Tax Implications of Divorce in California
Divorce brings about many changes, and one area that often catches people by surprise is taxes. At San Diego Divorce Mediation & Family Law, we know how important it is to understand these changes. As a leading firm with celebrated California divorce lawyer Scott Levin at the helm, we’ve helped many couples navigate divorce and taxes. Let’s dive into what you need to know about the tax implications of divorce in California.
Filing Status Changes
One of the first things that changes after a divorce is your tax filing status. This might seem small, but it can have a big impact on your taxes. Importantly, the IRS considers you married for the whole year if you’re not divorced by December 31st. This means you can still file jointly for that year if you want to.
After your divorce is final, you’ll file as either single or head of household. Filing as head of household can be a better deal if you have kids living with you most of the time. It gives you a bigger standard deduction and better tax brackets. However, there are rules about who can claim this status, and a California divorce lawyer can help you figure out if you qualify.
Dealing with the Family Home
For many couples, the family home is their biggest asset. How you handle it in the divorce can affect your taxes. If you sell the house as part of the divorce, you might be able to exclude up to $500,000 of the gain from your taxes if you file jointly. If one person keeps the house, they might only be able to exclude $250,000 when they sell later.
Sometimes, one spouse buys out the other’s share of the house. This can be complicated for taxes. The person who keeps the house might have to pay capital gains tax when they sell later. A skilled California divorce lawyer like Scott Levin can help you structure this deal in a way that minimizes taxes for both parties.
Child Support and Dependency Exemptions
Child support in California isn’t taxable income for the parent who receives it, and it’s not tax-deductible for the parent who pays it. But there are still tax issues to think about when it comes to kids.
The big question is often who gets to claim the children as dependents on their taxes. This can be worth a lot in tax credits and deductions. Usually, the parent who has the kids gets to claim them more than half the time. But parents can agree to split this up differently if they want to. A California divorce lawyer can help you work out an agreement that’s fair and makes sense for taxes.
Splitting Up Retirement Accounts
Dividing retirement accounts in a California divorce can be complicated. If it’s not done right, you might have to pay taxes and penalties. But there are ways to split these accounts without triggering taxes.
For 401(k)s and pension plans, you need something called a Qualified Domestic Relations Order (QDRO). This lets you transfer money from one spouse’s retirement account to the other without paying taxes. For IRAs, you can use a transfer that’s incident to divorce. These are technical processes, and it’s important to have a California divorce lawyer who knows how to do them right.
Capital Gains and Losses
When you divide up your property in a divorce, you usually don’t have to pay taxes on the transfer. But you might have to pay capital gains tax when you sell the property later. The cost basis of the property stays the same as when you were married.
For example, if you get stocks in the divorce that your spouse bought years ago for $1,000, and you sell them later for $10,000, you’ll have to pay tax on $9,000 of gain. It’s important to think about this when you’re deciding who gets what in the divorce. A good California divorce lawyer will help you consider the tax consequences of each asset.
Business Interests
If you or your spouse owns a business, dividing it up in a divorce can be really complicated for taxes. There are lots of different ways to handle this, like a buyout, continued co-ownership, or selling the business and splitting the money. Each option has different tax implications.
You might need to get the business valued, which can affect capital gains taxes later. If you’re going to sell the business, the timing of the sale can matter for taxes. These are complex issues that require the knowledge of a California divorce lawyer with divorce financial expertise who understands both divorce law and business law.
Tax Debt and Refunds
What happens to tax debt or refunds from joint returns you filed while married? Generally, you’re both responsible for any tax debt from joint returns. But there’s something called innocent spouse relief that might help if your ex-spouse did something wrong on your taxes without you knowing.
As for refunds, they’re usually split between you based on how much each of you paid. But you can agree to split them differently in your divorce agreement. A California divorce lawyer can help you figure out what’s fair.
Record Keeping
After a divorce, it’s really important to keep good records. You might need to prove that certain transfers were part of the divorce settlement. You’ll also want to keep track of alimony, child support, and other payments. Good records can help you avoid tax problems later.
Your California divorce lawyer should give you a list of important documents to keep. This might include your divorce decree, property settlement agreement, and records of any big asset transfers.
Get Help from a California Divorce Lawyer
Taxes after divorce can be extremely confusing. The rules are complicated, and getting them wrong can cost you a lot of money. That’s why it’s so important to work with a California divorce lawyer who understands these issues.
At San Diego Divorce Mediation & Family Law, we have the experience to help you navigate these situations. Our founder, Scott Levin, isn’t just a celebrated California divorce lawyer. He’s also a Certified Divorce Financial Analyst™. This means he has special training in the financial issues of divorce, including taxes.
We can help you understand how different divorce decisions will affect your taxes. We’ll work with you to create a divorce agreement that’s fair and makes sense for your taxes. And we can connect you with tax professionals if you need more specialized help.
Remember, the choices you make during your divorce can affect your taxes for years to come. Don’t try to handle this alone. If you’re facing divorce in California and you’re worried about taxes, reach out to us at San Diego Divorce Mediation & Family Law. Let Scott Levin and our experienced team help you make smart decisions for your financial future.
Give us a call at (858) 255-1321 or use our contact form to get in touch. We’re here to help you understand the tax implications of your divorce and find the best path forward for you and your family.
