Once a couple realizes that their marriage has become untenable, there are likely many issues that each individual will want to consider. Many couples who are in the beginning stages of filing for a divorce may not have yet considered the effect this change may have on their income taxes. Colorado residents may have many questions concerning how to handle these issues now, so as to avoid creating a financial hardship down the line.
The first thing that will need to be changed is one's filing status. No matter when the decree was issued, the Internal Revenue Service requires that one use the status that applied as of Dec. 31. This may result in a change in one's withholding and subsequent tax liability. Along with this change, if the couple have minor children, then they will need to resolve the question regarding which party will be entitled to any child-related tax benefits for a child.
Two other matters that may impact one's tax liability are child support and alimony payments. Currently, the tax laws allow the paying spouse to deduct alimony payments from his or her taxable income. That may be expected to change in the new year, as the one who pays would carry the tax burden while the receiving spouse would not have to claim those monies as part of their income. The former spouses may also have to address how to handle a family home, as there could be significant tax savings with careful planning. Likewise, one party may have to shoulder the liability if certain time limits and requirements are not met according to the proposed revisions.
Lastly, if either party owns a retirement account, such as a 401(k), then there are steps that can be taken that will allow the parties to avoid the penalties that can be applied for early withdrawal, as well as offsetting or delaying the taxes that would otherwise be due. There are many financial ramifications that can take a toll on one's tax liabilities. Colorado residents who may need more information concerning these issues, as well as any other divorce-related matters, may wish to consult an experienced family law professional.
Source: nasdaq.com, "5 Tax Moves to Make Now If You Just Got (or Are Getting) Divorced", Dan Caplinger, Nov. 13, 2017