Complex tax issues that people may need to address during divorce

On Behalf of | Mar 29, 2024 | Tax Planning

Complex divorces often involve a range of assets including investments, business holdings and real estate. Spouses may have enjoyed a comfortable standard of living throughout the marriage, which can impact expectations for both parties during the divorce process.

More complex marital estates can also inspire secondary complications, such as unusual tax issues. Those preparing for complex divorces may need to address certain tax issues while strategizing with their attorneys and while negotiating with their spouses.

Some tax issues have to do with liability

Divorce can potentially trigger a host of surprise tax obligations. For example, if spouses don’t follow the right process when dividing tax-deferred retirement savings, they could be at risk of income tax consequences for premature withdrawals from those accounts. They could also end up responsible for capital gains taxes if they liquidate long-term investments as part of the property division process. There can be tax implications when selling the marital home.

Spouses expecting to pay or receive alimony may also need to address the possibility of IRS alimony recapture if financial circumstances change. A major adjustment in alimony orders in the first three years could lead to tax complications for both the person paying and the person receiving alimony. Reviewing financial circumstances at length with a skilled legal team can help people identify the potential tax liability concerns for an upcoming divorce.

Some negotiations relate to income tax rules

There are two main income tax filing issues that spouses likely need to address when they divorce. The first and more universal issue is the need to file a joint return the year following the divorce in most cases. Spouses may need to make plans ahead of time to file that paperwork together or arrange to employ an alternate approach in some cases.

When spouses have minor children, they may need to negotiate an arrangement for sharing child tax credits and claiming costs for dependents on income tax returns. Some families allow one parent to claim the tax benefits of the children every year due to higher income or more parenting time. Other families arrange to alternate claiming the children.

Addressing both tax liability and income tax concerns can benefit those preparing for complex divorce proceedings. Spouses aware of potential tax complications can often minimize or avoid certain tax-related frustrations.