Getting a divorce can have an impact on many areas of a person's life. Some of the changes that accompany divorce are immediately apparent, such as differences in social, emotional and even physical parts of a person's life. However, one area that people may not immediately consider is how divorce may affect their taxes. When considering divorce, it is important to be aware of the potential tax implications that may be involved.
Most property transfers that occur as a part of the divorce process do not cause capital gains or losses for either spouse, so there are usually no immediate tax consequences for giving up or accepting property in a divorce settlement. However, things may become more complicated if an ex-spouse later decides to sell property that he or she received in the divorce. When this occurs and the property has increased in value since the time of the divorce, the seller may owe capital gains taxes based on the value of the property at the time of acquisition.
Special tax rules apply to the sale of houses after divorce, allowing divorced homeowners to avoid paying capital gains taxes on the sale of a home in certain cases. Generally, an individual who sells his or her home following a divorce may exclude up to $250,000 in capital gains if he or she has owned and lived in the home as a primary residence for at least two of the last five years. The two-year period is measured cumulatively, so it is not necessary for it to have occurred consecutively.
In addition, to be eligible for the exclusion, the seller must not have excluded capital gains on the sale of another home within the past two years.
The IRS treats alimony and spousal support as income for the spouse who receives it and as a deduction for the spouse who pays it. With this in mind, divorcing spouses may want to take their taxes into consideration while negotiating property division and spousal support issues in the divorce settlement. To minimize future income tax liability, a recipient spouse may prefer to negotiate a single lump-sum payment instead of receiving ongoing support over a period of time. In such cases, the paying spouse may want to negotiate for a lower lump-sum payment to compensate for the loss of the tax deduction he or she would have received by making ongoing payments.
Unlike spousal support, child support is neither taxable not tax deductible. Therefore, when a divorce involves both child support and spousal support, it is important to delineate the amount of each type of support to ensure that it can be classified properly for tax purposes.
In general, a child's custodial parent is entitled to claim the child as an exemption on his or her income tax returns after divorce. For tax purposes, a parent is considered "custodial" if the child lives with him or her for more than half the year.
However, parents may agree to alternate years claiming the exemption, or the court may order such an arrangement in the divorce decree. In these cases, the parents must file IRS Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) with their tax returns each year that the non-custodial parent claims the exemption. The custodial parent must sign this form for it to be valid.
Consult a Lawyer
Divorce can be fraught with unanticipated financial complexities. People going through divorce should seek advice from a seasoned divorce attorney with a history of success in protecting clients' interest.