San Jose Lawyer for Tax Issues Related to Divorce

Attorney Helping Address Divorce Tax Concerns in the Bay Area and Silicon Valley

Divorce can be a difficult process for many reasons, but the financial upheaval a person experiences is often one of the greatest areas of concern. The decisions made can have a huge impact on the taxes a person owes, the deductions that can be claimed, and the ability to meet ongoing financial needs. For these reasons, it is essential to have a full understanding of the tax issues involved in a divorce case.

With more than 30 years of experience in tax law, John D. Teter Law Offices can provide assistance in understanding how a person's taxes will be affected by the decisions made during divorce. We can help determine the best tax strategies to use both during and after divorce.

Divorce Tax Issues

Divorcing spouses should be sure to understand all aspects of their finances and be prepared for the tax changes they will experience. While these changes may be fairly straightforward in some cases, people with large incomes, significant assets, business interests, or other financial concerns may need to resolve complex tax issues.

During divorce, it is important to be aware of the following:

• Filing status - While the divorce is still pending, it may be beneficial for spouses to continue to file a joint tax return. They may be able to do so if they were still legally married at the end of the year. However, if a divorce was finalized on December 31 or earlier, spouses must file taxes separately for that year. Following divorce, an ex-spouse may file as head of household if a dependent child lived with that person for more than half of the year, which will allow them to claim a larger standard deduction.
• Community income - California is a community property state, which means that income earned by spouses during a marriage is considered community income. Following divorce, an ex-spouse will be taxed on half of the community income earned for that year, as well as on any separate income earned after the marital community ended.
• Tax withholding, credits, and dependents - If the couple has children together, only one parent may claim a child as a dependent, and this parent may also be eligible to receive tax benefits such as credits for child and dependent care expenses. While the custodial parent will typically claim a child as a dependent, parents may agree to other arrangements, such as alternating between claiming a child as a dependent each year. Following divorce, spouses should submit a new W-4 form with their employer to ensure that the correct amount of income tax is being withheld based on the number of dependents they can claim.
• Support payments - A parent who pays child support cannot deduct these payments from their taxable income, and the payments are not taxable for the recipient. For divorces finalized on or after January 1, 2019, spousal support (alimony) is treated the same as child support from a tax perspective, but for divorces completed before that date, alimony will continue to be tax-deductible for the payor and taxable for the recipient.
• Property settlements - If any property is transferred between spouses as part of the divorce settlement, this is typically not considered a taxable gain or loss. However, there may be cases in which these transfers are subject to gift taxes, although the first $15,000 of a gift is eligible for a gift tax exclusion. If divorcing spouses choose to sell their marital home, they will be required to pay taxes on the gain from that sale, although up to $250,000 can be excluded when filing taxes separately, or up to $500,000 when filing taxes jointly.
• Retirement accounts - If funds in retirement accounts such as 401(k)s or IRAs are transferred between spouses as part of the divorce settlement, a Qualified Domestic Relations Order (QDRO) should be used to avoid taxes or penalties for early withdrawal.

Contact a Santa Clara County Divorce Tax Attorney

During divorce, tax considerations can become very complex. Obtaining a full understanding of these issues can help a person avoid potential penalties and be prepared for ongoing financial success. John D. Teter Law Offices can provide tax consultation during divorce, ensuring that all issues are properly addressed. Contact our office by calling 408-866-1810 to arrange a consultation.