Tax Issues in a Chester County Divorce
Dealing With Taxes During a Divorce
As emotionally draining as divorce can be, it is largely about financial responsibilities. More than anything else, you will find yourself dealing with dividing your marital assets, assigning debt, and figuring out support payments for your ex and children. It is important to pay close attention to how your taxes can be impacted by this process as well. If you are not careful, you may end up paying more than you expect if you do not thoroughly understand how your income has changed and what requirements you need to fulfill to receive exemptions.
Since 1992, the Law Offices of Sheryl R. Rentz, P.C., has served clients throughout Chester County with complex, high-asset divorces. If you bring your case to us, we can review the financial and legal details of your divorce and explain how state and federal tax laws can impact your future. If you have questions regarding the tax requirements of your Chester County divorce, call us toll-free at (866) 290-9292 to receive a free case evaluation.
Understanding the Tax Implications of a Divorce
Whether you are dealing with a high-asset divorce or you have a more straightforward case, taxes could be a major roadblock during your divorce proceedings. Depending on when your divorce is finalized and how your case is settled, you could end up with high taxes in the upcoming year.
For one, your filing status may change from “married” to “unmarried” if you finalized a divorce within the previous year, even if it was on December 31. Unlike other states, Pennsylvania does not have legal separation, meaning you cannot use it as an exception for state or federal taxes if your divorce occurred in the middle of the year. This is why most divorces take place in January, as it allows you to receive married deductions on your taxes.
If you wish to do so, you can also choose to file separately from your ex, but there are still downsides to this approach. You will not be able to receive Earned Income Credit (EIC) or education credits and any child credits will be cut in half compared to joint filing. If you receive social security, you may have to report higher amounts than if you file as married.
There are also certain taxes you may have to pay depending on how your household is divided up. Investments, for example, may be subject to capital gains taxes if one spouse sold them to the other, changing the overall value of the stocks or bonds. Real estate, marital debt, and other assets all have unique tax implications when the property is divided or sold between spouses, and you will want to review each of them with your attorney, especially if you are involved in a high-asset divorce.
Tax Requirements for Support Payments
Due to the Tax Cuts and Jobs Act, the tax requirements of support payments changed in Pennsylvania. There are also other limitations that come with a divorce, such as only one parent being able to receive child credits. These tax requirements include:
- Alimony: Starting January 1, 2019, alimony is no longer considered a form of income and cannot be taxed by Pennsylvania or the IRS. It is also not considered tax-deductible, meaning payors cannot include it in their deductions. In addition, any voluntary payments outside of the agreement are not exempt from taxes and should be reported.
- Spousal Support: Like alimony, spousal support is no longer taxable income or tax-deductible.
- Child Support: Child support is not treated as income and is not tax-deductible.
- Child Custody: Only one parent can claim a child as a dependent when filing taxes. Typically, this is the parent who has sole physical custody. If you have joint custody, the credit may only be available to the parent with the higher income.
Protecting Your Financial Future
Fulfilling both state and federal tax requirements during a divorce requires an in-depth look at your finances and careful consideration of how divorce can impact you going forward. You do not want to rush through a divorce and end up owing a ton of money to the IRS by the next tax season. It is in your best interest to consult a knowledgeable and experienced Chester County family law attorney at the Law Offices of Sheryl R. Rentz, P.C., before you make any final decisions. Based on our 25 years of experience achieving positive outcomes for clients, we can review your situation in a free consultation and advocate for your best interests. Call us today toll-free at (866) 290-9292 to get started on your case.