As the divorce rate continues to rise, more and more couples end their marriages without truly understanding what they are getting into when it comes to taxes. It seems particularly true when it comes to high-asset divorces.
Once you’re divorced, you will need to account for the division of assets on your tax returns. Determine who gets what can be complicated enough without additional tax implications, especially if one spouse has primary custody of the children.
In all of these, an attorney in Knoxville, TN, acts as an invaluable resource to help you figure everything out. So let’s know some basic tips for handling tax issues during a divorce.
Handle tax issues effortlessly for a fair divorce settlement
Divest yourself of joint ownership
Depending on your situation, selling certain investments may be difficult or even impossible. But if you’re pursuing a divorce, it’s time to divest yourself of joint ownership. If you own an investment or bank account with your spouse, then that asset will need to be divided between the two of you.
If you’re the high-earning spouse, then you’ll probably be responsible for any back taxes, including penalties and interest. It could be true even if you didn’t own the asset at the time that taxes were assessed.
Avoid giving away your refund
Because the IRS considers personal income as a joint venture, your ex-spouse is entitled to half of any refund you receive. If you’re asking for alimony, then the IRS may even want to take that money back.
Avoid this by filing separate tax returns with your spouse, especially if you’re still in the process of dividing assets. When you receive your refund, you can simply keep it for yourself. When you attain your first meeting with a divorce attorney, you need to be prepared for all these.
If you’re not in the habit of filing separate returns, consider doing so for at least the next few years. Withholding from your alimony may require you to account for the amount withheld on your ex-spouse’s tax return.
Understand how your divorce affects your tax debt
If you and your spouse owe back taxes, then this can make things even more complicated in a divorce. You will have to work out how you’re going to settle your joint debt, which could include paying it off in full or having one person take responsibility for the debt.
If you’re the spouse who didn’t have primary custody of the children, then it’s likely that you’ll be held responsible for the debt. It means that before your divorce is finalized, you should do whatever you can to pay off as much of your tax liability as possible. But even if you’ve already settled the debt, expect an audit.
You can avoid an audit by filing separate tax returns with your ex-spouse, which would include any tax liability that may be connected with the debt.
Know how alimony affects your taxes
In most cases, people who receive alimony or spousal support have to report this as income. This means that the money you receive from your spouse each month will increase your annual income and probably push you into a higher tax bracket.
If your income was already on the high end, then receiving alimony may push you into a higher tax bracket. This means that filing separately with your spouse isn’t going to do much good. Instead, consider asking for additional assets instead of spousal support.
It’s essential to remember that any money you receive as compensation for your spouse’s debt will also be considered income. As such, if you’re indebted to your spouse for back taxes or any other form of liability, then the IRS may consider this compensation.
If that happens, then you’ll likely have to pay the full amount of what you owe all over again. To avoid this scenario in Knoxville, divorce attorneys make sure that you’re properly withholding from your paychecks.
Spousal Buyouts in a Divorce Settlement
Buying out a spouse’s share of an asset is one way to ensure that you retain full ownership. For example, if your spouse is buying your share of the marital residence, you won’t have to worry about them on the title.
But this will affect how much tax you pay on the sale. The IRS considers you to own any registered assets under your name, regardless of who contributed what toward their purchase. It means that you’re going to have to pay capital gains tax on your spouse’s contribution.
The greatest way to avoid paying this tax is if your spouse registers the asset in both of your names. This means that you’ll both be responsible for the capital gains tax when you go to sell it. Also, if your divorce settlement allows your spouse to buy out their share of an asset, you are going to avoid paying capital gains tax on the entire value.
Conclusion
Divorce is never easy. But the procedure becomes even more complicated when you’re dealing with tax issues as well. That’s why it’s essential to understand how your divorce is going to affect your tax liability. More importantly, you need to take proactive measures by filing separate returns with your spouse or changing your withholding, so you don’t have any additional fees come tax season. Contact an attorney in Knoxville, TN, for the tax consequences of your divorce. They can provide you with more information on avoiding any complicated tax issues.
