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San Diego Family Law Attorneys Handling Tax Issues and Divorce

Helping Divorcing Couples Resolve Tax Issues in San Diego
Common Tax Considerations in California Divorces
Property Division and Capital Gains
Child Support and Tax Exemptions
Tax Credits and Deductions

Timing of Divorce and Filing Status
Qualified Domestic Relations Order (QDRO)
The Importance of Legal Representation
Speak with a San Diego Divorce Lawyer

Helping Divorcing Couples Resolve Tax Issues in San Diego

Going through a divorce is never easy, no matter how ready you are to move on to the next chapter of your life. Aside from having to deal with a mix of emotions when a marriage ends, there are also many details and financial issues that must be figured out. One of the biggest economic impacts a dissolution of partnership has on each of the parties involved concerns income taxes. For most people, filing taxes is a complicated enough task already without adding in the circumstances of a divorce. Regardless, it’s a significant aspect of the process that cannot be ignored.

Mattis Law, A.P.C. is a family law firm in San Diego that specializes in representing clients who need professional guidance navigating through the complexities that emerge when the worlds of divorce and taxes collide. We understand the various types of tax issues that have the potential to arise in divorce proceedings and know how to address them appropriately. As a client of ours, you can rest assured that we will explain all the tax implications that may affect the final outcome of your divorce settlement so you can make informed decisions about your future.

Give us a call at (858) 328-4400 today to schedule a free consultation.

Common Tax Considerations in California Divorces

There are a variety of tax issues that divorcing couples should take the time to learn more about. A new marital status means there will be changes in how income taxes are filed. The most common tax considerations in California include the following:

Alimony deductions: When an alimony payment, or spousal maintenance, is ordered in a divorce, the payer is able to deduct the amount on their taxes. The former spouse receiving the alimony will be required to report the amount on their taxes as income.

Dependent exemptions: If a divorcing couple has children, custody is typically a major matter that must be worked out, which also has a big impact on taxes. Once the custodial parent has been decided, it’s time to agree on who will be claiming the dependent on their taxes. There are considerable tax deductions for a dependent, often making it difficult for parties to come to terms on this issue. To avoid problems down the road, it is standard practice for an attorney to advise a client who is entitled to claim dependent exemptions to get a signed IRS Form 8332 from the other party.

Filing options: The filing status for an income tax return will depend on the legal marital status of the couple at the end of the calendar year. If a divorce is still pending, the couple has the option to file jointly, married but filing separately or independently. The decision can be difficult to make without discussing the potential outcomes for each option with a professional first. It’s essential to go over the tax burdens and benefits of all the choices in order to maximize tax gains and lower liabilities.

Additional factors that often influence tax returns during or after a divorce include child support, retirement accounts, division of property, and legal fees when it involves getting tax advice from a divorce attorney.

Property Division and Capital Gains

Divorce proceedings often involve the intricate task of property division, and it’s important to understand the potential tax implications, particularly concerning capital gains. Different types of assets, including real estate, investments, and retirement accounts, may trigger capital gains taxes based on their valuation and subsequent transfer.

Real estate: Sale of primary residence eligible for capital gains exclusion up to $250,000 for individuals or $500,000 for married couples filing jointly. Transferring property between spouses as part of divorce is usually nontaxable.

Investments (stocks, bonds, etc.): Selling investments may incur capital gains tax. Tax rate depends on factors like holding period and income level. Transferring assets between spouses during divorce is typically non-taxable.

Retirement accounts (401(k), IRA, etc.): Dividing retirement accounts in divorce requires a court order called QDRO. QDRO allows tax-free transfer of retirement funds between spouses. Without QDRO, early withdrawals may result in taxes and penalties.

Tax considerations for all assets: Selling assets before divorce finalization can optimize tax outcomes. Consider seeking advice from tax professionals or financial advisors for personalized guidance based on your specific circumstances.

Child Support and Tax Exemptions

Child support is a fundamental aspect of divorce settlements, but its tax treatment differs from other financial components. Child support payments are generally not tax-deductible for the paying party nor considered taxable income for the recipient. It’s essential for divorcing parents to understand this distinction and plan accordingly.

Moreover, addressing the allocation of tax exemptions for dependent children is essential. Divorce agreements typically stipulate which parent is entitled to claim these exemptions, impacting each party’s tax liability. Clear communication and legal guidance are crucial in ensuring compliance with tax regulations and avoiding disputes.

Tax Credits and Deductions

Divorce may impact various tax credits and deductions, such as:

Child tax credit: Generally available to parents with dependent children under 17. The custodial parent usually claims the credit, but in shared custody situations, it may be determined by the divorce agreement.

Child and DEPENDENT CARE CREDIT: Available for child care expenses enabling a parent to work. Both custodial and noncustodial parents may qualify based on incurred expenses.

Earned income tax credit (EITC): Available to low to moderate-income individuals, particularly those with children. The custodial parent may qualify for a higher EITC amount, while noncustodial parents may still be eligible under certain conditions.

Education-related deductions and credits: Various credits (e.g., American Opportunity Credit) for qualifying education expenses. Parents need to decide who claims these benefits based on the divorce agreement.

Head of household filing status: Available for unmarried individuals providing a home for a qualifying child or dependent. The custodial parent may qualify, often resulting in a lower tax rate compared to Single status.

Timing of Divorce and Filing Status

It’s important to know how divorce affects your tax filing status. If your divorce was finalized before December 31st, you are considered unmarried for tax purposes. This means you can file as single, married filing separately, or married filing jointly. If you have dependents, you may also qualify for Head of Household status.

Joint filing can result in lower tax rates, but it also means that both spouses are jointly responsible for any taxes owed. On the other hand, separate filing allows for individual responsibility, but it may result in higher tax rates and lower deduction limits. The best filing status depends on your individual circumstances. If you had an amicable divorce, you may benefit from filing jointly. However, if your divorce was contentious, separate filing may be preferred. After the divorce is final, you will file as Single or Head of Household.

Qualified Domestic Relations Order (QDRO)

Under California law, a Qualified Domestic Relations Order (QDRO) is crucial in dividing retirement accounts during divorce. A QDRO is a court order that outlines how retirement benefits are allocated between spouses. It allows for the tax-free transfer of funds from one spouse’s retirement account to the other’s, ensuring an equitable distribution of assets. Without a QDRO, early withdrawals or transfers might incur taxes and penalties.

The tax implications of a QDRO depend on the specific circumstances, but generally, if the transfer is made directly to the alternate payee (non-employee spouse), it is not subject to immediate taxes or penalties. However, subsequent withdrawals from the recipient spouse’s retirement account may be taxable. Seeking legal and financial advice is key to navigating QDROs effectively during the divorce process.

The Importance of Legal Representation

The knowledge, skills, and resources, of an experienced San Diego divorce lawyer are vital when it comes to navigating the intersection of family law and tax considerations. Family law attorneys who specialize in handling divorce cases can offer invaluable assistance in dealing with complex tax implications. Your attorney can help you make informed decisions that align with your financial goals and ensure your interests are represented throughout the legal process.

Speak with a San Diego Divorce Lawyer

There are a number of financial issues to be considered in divorce cases, making it vital to have proper legal counsel working on your behalf to protect your best interests. That’s where Mattis Law, A.P.C. comes in.

With a history of success and client satisfaction, our San Diego family law team specializes in divorce. We are here to help you resolve all your tax issues and provide dedicated support throughout the legal process.