Everyone knows the tax code is complex and it's because of this complexity that you should understand tax considerations before you finalize your divorce so you can address any potential issues now rather than waiting until tax time is upon you. It's also a good idea to speak with a tax professional to get the best advice for your specific situation, as each case is unique and special tax ramifications exist depending on the circumstances.
That being said, it may still be helpful for you to understand some basics about how divorce can affect your taxes. The first big thing to remember is that that your filing status depends on your marital status on the last day of the calendar year for which you are filing. If you are still married, your spouse and you must decide together whether to file jointly or separately. When filing separately, it is usually the primary custodial parent who receives the exemption for children as dependents, though under certain circumstances the exemption can be released to the other parent. If the exemption is released, the custodial parent may lose head of household status or the tax rebate for the children.
The next big issue involves spousal support. It is important to remember that spousal support payments are generally treated as income for the party that receives them and are deductible for the paying spouse. The Internal Revenue Service, as is its nature, has a number of detailed rules regarding such spousal support payments that must be followed. For instance, spousal support must be paid in accordance with a written divorce decree, separation agreement, or marital settlement agreement. Child support payments are never deductible or considered as income. Given these differences, it's important to consider how your potential payments will affect your taxes when discussing the terms of a divorce settlement.
The sale of a marital home, either to an ex-spouse or a third-party, can create a capital gain tax problem during divorce. This depends on the value of the house, how long the marital property was occupied and how fast ex-spouses reinvest profits in a new home.
Tax complications also apply to retirement plans, which require a court-generated Qualified Domestic Relations Order to divide. The terms of the retirement plan, the portion of funds to be divided, and the timing of fund transfers are all critical points that must be addressed in order to avoid tax problems after divorce.
If you find yourself facing the prospect of a separation, divorce, or other family financial issue, you need the help of an experienced South Carolina family law attorney to guide you through the difficult process.