Tax Implications Of Divorce

By Ronald Kimmons. May 7th 2016

Divorce can be an extremely frustrating and inconvenient process and adding tax difficulties on top of that can make it nearly unbearable. To minimize the negative impact of divorce on your finances and your personal life, you should understand the tax implications of going through with a divorce and act to preempt any negative influences that could occur.

The Sale Of Assets

One of the main issues in most divorce cases is the manner in which assets, such as the couple’s primary residence, will be divided. In some cases, this question may result in a court battle. Whether the division of assets is determined in court or by some other means, it often results in the sale of assets that cannot be divided. For example, a court may rule that each individual should receive half of the cash resulting from the sale of a piece of real estate. When it comes to taxes, if they are filing separately, each is responsible for paying taxes on any capital gains from that sale. If the couple bought the property for $100,000 and sold it for $150,000, each individual is responsible for paying the necessary tax on $25,000 in capital gains. If the property in question is the couple’s primary residence, the normal tax breaks for capital gains on the sale of a primary residence apply.

Tax Debts

When two people get divorced, they have to determine not only how to divide their assets, but also how to divide their debts. In some cases, couples may have amassed large amounts of tax debts. When it comes to federal income tax, for years in which the couple filed joint tax returns, they are usually both accountable for the tax debts resulting from those years. However, if they filed separately, they typically only are accountable for the tax debts associated with their own individual situations.

Innocent Spouse Relief

Even when a couple files its tax returns jointly, in some cases, one spouse may qualify for innocent spouse relief from the Internal Revenue Service. According to the IRS, an individual must meet four qualifications in order to receive innocent spouse relief:

  1. Tax Return Type: The couple must have filed a joint tax return.
  2. Erroneous Item(s): That joint tax return must have an understated item that resulted in the couple paying less in income tax than they should have.
  3. Evidence Of Innocence: The individual in question must be able to prove that he or she was unaware of the understated item and had no reason to know about it.
  4. Reason For Relief: The individual in question must be able to show that holding him or her accountable for the understated item from the joint return would be unfairly burdensome.

If one of the individuals involved in a divorce qualifies under these four guidelines, he or she may be able to escape the burden of tax debt from the marriage.

Divorce And Bankruptcy

Since marital problems and financial problems often come together, divorce and bankruptcy have become close cousins in the United States. If you have a divorce and a bankruptcy occurring simultaneously, keep in mind that tax debts may not be discharged in a bankruptcy. If you are responsible for a tax debt that was accrued during your marriage, neither divorce nor bankruptcy can absolve you of this responsibility. However, remember that some tax debts may be paid when the bankruptcy results in the liquidation of assets. For example, if the bankruptcy court rules that a jointly owned vacation home must be liquidated, it will use the cash from that liquidation to pay off debts – including tax debts. (To learn more about bankruptcy, see 10 Common Myths About Declaring Consumer Bankruptcy.)

Spousal Support And Alimony

Divorce proceedings may result in the wealthier spouse being required to periodically make payments to the less wealthy spouse even after the divorce is finalized. These payments may be called spousal support or alimony. If an individual receives such payments, he or she must count them as taxable income on all future tax returns. If an individual makes such payments, he or she may count them as deductions on all applicable tax returns.

Filing Status

When filing federal tax returns, U.S. citizens may file as single individuals, married individuals filing separately or married individuals filing jointly. Your ability to file as a married individual depends upon your marital status on the last day of the year in question. If you intend to file a joint tax return, you must still be legally married at the end of the year in question. If your divorce is finalized on the last day of the year, you cannot file a joint return. However, if your divorce is in process at the end of the year but not finalized until the first day of 2013, you can still file a joint return for 2012.

Keep this information handy if you are going through a divorce. It could end up saving you money when tax season rolls around.

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