Tax Ramifications of Divorce

Getting a divorce in New York causes more than just emotional complication. After all, as a married couple, the people seeking a divorce presumably shared with one another more than just their feelings. Real property, bank accounts, credit and debit cards, children, pets, liabilities… When divorcing, there is much more to untangle than purely emotions.

One major area that requires untangling is the area of taxes. Most married couples - though not all – file their taxes together; once their divorce is final, they can no longer do so. When does the couple begin filing separately?

The IRS considers you a single person (i.e. ineligible to file as a married couple) for the year your divorce was finalized. For example, if your divorce was finalized on November 22, 2012, you would file a single that following April (of 2013) for that tax year 2012. Even if your divorce was finalized on December 31, 2012, you would still file as single that following April. Couples should understand this and plan the timing of their divorce accordingly.

There are quite a few other tax ramifications that result from getting a divorce. Factors each party should consider are the tax consequences of spousal support and child support.

The payor of spousal support is entitled to claim those payments as a deduction on his/her taxes. The recipient of spousal support must list those payments as income on his/her taxes.

Child support, on the other hand, is non-taxable and non-deductible. The payor of child support cannot deduct those payments on his/her taxes, and the recipient of those payments does not list those payments as income on his/her taxes. (This difference in tax treatment (between spousal support and child support) can be explained by the fact that courts believe that child support is for the benefit of the parties’ children, and therefore should not be something a payor can claim as a deduction – nor should the recipient have to claim those payments as income.)

And yet there can be more tax ramifications – for example, ramifications related to asset distribution. There is a certain tax imposed by the federal government called a Capital Gains Tax (“CGT”). In (very) brief, a CGT is imposed when a person sells (i.e. transfers title of) a capital asset they own (such as a house or stock) at a profit. The difference between the original price the person paid for the asset (the “basis”) and the price they sold it for is called a “capital gain” – and that is the amount that is taxed at a percentage.

This is important when couples are making decisions regarding the distribution of their marital property. Though capital gains taxes are NOT triggered when one divorcing spouse transfers title to the other through a separation agreement or a divorce judgment, (which is nice), they are triggered when, for example, a wife who got 200 shares of Stock X valued at $20,000 decides to sell them to a third party later on. What the wife believed to be worth $20,000 – which made her feel okay about letting her husband keep their $25,000 car – may, in the end, be worth much less due to the capital gains taxes she will have to pay upon the sale of those stocks to a third party.

Depending on your personal circumstances, this may be just the tip of the iceberg with regard to tax ramifications in divorce. Contact an experienced divorce attorney like the attorneys of Peter L. Cedeño & Associates, P.C. to help you become aware, understand, and work through all of these tax-related issues in your divorce.

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