When a person goes through a divorce, they’re not always thinking about the future. They want to get as much money as they can—and as soon as possible.
When you’re going through your settlement options, you may not be thinking about taxes—but you should be. Taxes can be complicated and costly. If you don’t know you owe taxes on money or an asset, you could end up paying more in penalties.
Let’s face it—taxes can be confusing. However, it’s important to understand the basics so that you can make informed decisions and optimize your settlement. Here’s what you should know.
There are four main ways to file your taxes: married filing joint, married filing separate, single, and head of household. To claim head of household status, you must be legally single, pay most of the household expenses, and have a child living with you most of the year. A parent for whom you pay most of their living expenses would also qualify.
You choose the best option based on your marital status as of December 31 of the tax year. You both are liable for everything reported or not reported on a joint return. It doesn’t matter who earned the income.
When deciding who claims the child on the taxes, it is typically the custodial parent. The IRS defines the custodial parent as the one who has the child for more overnights. If the overnights are equal, then the custodial parent is the one with the higher income.
When splitting an investment account, pay attention to the purchase price of the securities. It’s a good idea to ensure the settlement agreement outlines which party will receive any tax refunds or tax debt.
You may also want to work with a CPA to determine how much each spouse owes based on their income, as splitting the taxes owed in half may not be reasonable. Ask your CPA about how to best divide tax refunds, deductions, and penalties, as well as how to claim dependents.
A Qualified Domestic Relations Order (QDRO) is a legal document that can help a divorcing couple avoid taxes on retirement plans. The plan administrator distributes a portion of the retirement benefits to the spouse in a non-taxable transfer. Typically, there is a 10% penalty on withdrawals before 59 ½, but a QDRO helps avoid this.
Divorces are complicated and many are concerned about money matters, particularly taxes. The amount of taxes you have to pay can impact your final outcome, so don’t neglect tax ramifications.
A Columbia divorce lawyer from The Law Offices of Todd K. Mohink, P.A. can help you understand the impact of your divorce settlement. Understand how you will be affected so you can be prepared. To schedule a free consultation, fill out the online form or call (410) 774-5987.
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