Tax Implications of Divorce in California

Divorce introduces significant changes, with taxes often being an unexpected challenge. At San Diego Divorce Mediation & Family Law, we recognize the importance of understanding these changes. Led by San Diego divorce and family law attorney Scott Levin, our firm has guided countless couples through the complexities of divorce and taxes. Here’s 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 as a divorce financial expert and mediator in La Jolla California, Scott Levin ca help give you guidance to create a settlement plan that keeps as much money in the family and out of the government coffers as possible.

Suspended Divorce: Filing Jointly and Benefits

If you and your spouse are in the process of divorcing but have not yet finalized your divorce decree by the end of a tax year, you may still qualify to file a joint tax return. And by suspending your divorce so that your marital status doesn’t terminate, you can continue to file jointly for as long as you both agree which  can provide several advantages, including:

• Lower Tax Rates: Joint filers often benefit from more favorable tax brackets, reducing the overall tax liability.
• Higher Standard Deduction: The standard deduction for joint filers is typically double that of single filers.
• Access to Tax Credits: Filing jointly may allow you to claim valuable tax credits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit, which may not be available when filing separately.

Dealing with the Family Home

For many couples, the family home is their biggest asset. How you divide your home during divorce in affluent communities in California can impact your taxes. For those wanitng to carefully consider tax liabilities in the division of assets and property, we believe that our Carlsbad divorce mediator and mediation for divorce in Chula Vista and in all of the affluent throughout California can save you from unnecessary tax liability burden.

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.

Many of our clients agree to a buyout of a home during divorce in San Diego County so that one spouse retains the house as their separate asset followin divorce. , 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. As a top rated California divorce mediator, Scott Levin 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 a San Diego business in divorce can result in mistakes that come with tax complications. To avoid this, exploring in mediation all the different ways to handle a business buyout or continued co-ownership or sale needs to be undertaken.

You may need to have the business professionally valued, as this can significantly impact potential capital gains taxes in the future. If you plan to sell the business, the timing of the sale can also play a crucial role in determining your tax obligations. These are intricate matters that demand the expertise of a California divorce lawyer with financial planning expertise like Scott Levin is so valued.

Scott combines his expertise in divorce and business law with a deep understanding of financial matters related to divorce. He assists clients in preserving their assets by crafting well-structured settlements. Given the various options that come with specialized tax implications, Scott has a great network of of top professionals he can bring into the mediation to provide guidance. Clients routinely share gratitude for this network of experts including CPAs such as David Dolan at Considine & Considine and Christopher Lamb at Class Advisors.  Accountants with knowledge and a desire to earn your trust to provide guidance as neutral financial advice during a divorce or counsel for just one side provide value offer strategic tax planning.

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.

Scott Levin Mediates Divorce Settlements with a Plan for Taxes

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 mediation lawyer and Certified Divorce Financial Analyst near me like Scott Levin who understands these issues.

At San Diego Divorce Mediation & Family Law, we have the experience to help you navigate these situations. Our founder and top rated San Diego mediator Scott Levin, isn’t just a celebrated lawyer mediator and financial expert for divorce known as a CDFA, he also is a community property professor in law school.

We can help you understand how different divorce decisions will affect your taxes. Craft a divorce settlement agreement with family law attorney who is compassionate, experienced and fair minded to get a result that makes sense for your 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.