Divorce can upend and confuse every aspect of an individual’s life. This often causes emotional stress and turmoil, affecting daily rhythms, peripheral relationships, and financial stability. However, another facet of life isn’t discussed as often despite its impact on the individual’s life. There are several significant tax implications of divorce, which can further complicate an already complex situation if they are not addressed properly.
By addressing these implications, one can work to prevent additional financial strain and complications during a divorce. For more information on the tax implications of divorce, and to ensure your financial rights remain protected, consider speaking with an experienced South Carolina family lawyer from King Law Offices. Schedule a consultation today by contacting the office at (888) 748-KING.
Understanding the Tax Year
The first thing to be aware of when addressing the tax implications of divorce is the nature of the fiscal tax year. According to the Internal Revenue Service, the tax year is an accounting period that covers the expenses of that year and keeps track of the taxes owed to the government. For most individuals, this year runs from the 1st of January to the 31st of December.
Most people file for their tax returns in the new year, once the tax year is over. However, this may have implications for a divorce depending on the timing. In South Carolina, if an individual is divorced at some point in the calendar year, they are considered divorced for the entirety of that year. This means that the individual would file their taxes as single, assuming they do not remarry in that year.
This means that, if an individual begins pursuing a divorce in November and gets the divorce finalized in January, the return that is due for the previous year must be filed jointly. This is because the state recognizes that the individual was married for the entirety of the tax year in question.
Filing Taxes During Legal Separation
Another tax implication of divorce that is worth noting is the South Carolina Legislature’s lack of recognition for legal separation. Instead, the courts of South Carolina employ a method called an Order of Separate Maintenance and Support, according to the South Carolina Bar.
Due to this nuance of the law, legally separated couples are still considered to be married for tax purposes. The tax implications of divorce in this are that, even if couples are pursuing a divorce or living separation, couples will still file jointly until a divorce is finalized. However, these couples do have an option to file as “married but filing separately.”
How To File After a Divorce
However, once a divorce is finalized, there are several beneficial steps to take to address the tax implications of divorce. With a changed marital status often comes various changes in financial expectations, and these may affect one’s taxes.
Filing as Single
The first and most straightforward step to take is to begin filing as “single,” assuming that the individual was divorced in the tax year and has not remarried. However, this task may not be as straightforward if either spouse is the owner of a business, has real estate investments, or generally has a more complex tax situation.
While most couples split the tax liability and tax benefits evenly between them, this may not be suitable for more unique situations. For more specific details on dividing tax benefits in a divorce, consider speaking with an experienced family law attorney from King Law Offices.
Evaluating Head of Household Status
Among these tax implications of divorce, one must also consider whether or not they are filing as a head of household. Individuals qualify for head of household status if they are currently providing for a dependent or child and supplying housing. In addition, they must also be unmarried by the end of the tax year, have lived in their home for at least half a year, and have paid more than half the cost of keeping up the home that year.
In these situations, with the factors of maintaining both a place of living and also providing for another person, individuals may have reduced tax liability and may pay less in taxes.
Factoring in Child Support and Alimony
Another factor to consider in divorce and taxes is the effect of alimony and child support. Depending on the circumstances of the divorce, these factors may need to be reported on yearly taxes and may have their own implications. Under current federal income laws, spousal maintenance or alimony is considered non-taxable. This is similar to the way that child support is paid after tax.
Other Tax Implications of Divorce to Consider
However, these are not the only factors involved in taxation post-divorce. There are many smaller and more specific tax implications of divorce that may come into effect in certain circumstances.
Tax Loss Carry-Forwards
According to federal tax laws, a tax loss carry-forward occurs when an individual reports a loss on their taxes up to seven years after the tax loss was incurred. The complexities of the tax laws allow for certain benefits to be gained from this, which may cause these tax losses to be assets involved in a divorce settlement negotiation. This will generally follow the rules of equitable distribution.
Rights to IRAs and Pensions
Retirement funds are generally considered to be jointly owned by a married couple and therefore are generally divided between spouses during a divorce. However, depending on the type of IRA or savings account, this may come with unexpected tax implications.
Filing After Remarrying
Due to the laws surrounding the tax year, if one remarries during the tax year, one must file as married even if the individual was divorced that same year. Just as a divorcee is considered unmarried for the entire year of the divorce, the same applies to remarriage.
Reconsidering and taking into account both finances from the divorce and the new finances of the remarriage is advisable. The conflict between the two may cause additional complications, but these can generally be mitigated with dedicated effort or the help of a professional.
Contact an Experienced South Carolina Family Attorney Today To Ensure Your Financial Rights Are Protected
The tax implications of divorce can often lead to financial confusion and difficulty in an already confusing and stressful time. There are also marriage settlements and other agreements that could deeply alter or affect these situations. Understanding and addressing these financial complications may be overwhelming at first, but having a clear picture and orderly finances can help remove obstacles to moving forward.
For more information on finances, taxation, and divorce, consider speaking with an experienced and skillful South Carolina family law attorney from King Law Offices. Schedule a consultation by calling the office at (888) 748-KING.