Divorce and Taxes
Seeking Divorce & Tax Relief in San Diego?
Divorce is a life-altering event that brings emotional, financial, and legal challenges. In addition to the emotional toll, divorcing couples must also navigate the intricate web of tax implications that come with the dissolution of their marriage. This is especially true for residents of California, where divorce laws and tax regulations intersect in unique ways. At Moore, Schulman & Moore, APC, we are experienced in helping individuals and families in San Diego County navigate the divorce process and understand the tax implications of a wide range of divorce-related issues.
One of the first decisions divorcing couples in California need to make is whether to file as married or single for their taxes. Your marital status on December 31st of the tax year will determine your filing status for that year. If your divorce is finalized by this date, you'll likely be required to file as either single or head of household if you have dependents. Keep in mind that your filing status will affect your tax rates, deductions, and credits.
California follows community property laws, which means that most assets acquired during the marriage are considered jointly owned by both spouses and should be divided equally during divorce proceedings. However, the tax implications of property division can be complex.
Capital Gains Tax
When transferring assets such as real estate or stocks, capital gains tax may come into play. California law allows for the tax-free transfer of community property between spouses during divorce. This means that neither spouse will be subject to capital gains tax at the time of transfer. However, when the recipient eventually sells the asset, capital gains tax will apply based on the original purchase price.
The division of retirement accounts like 401(k)s and IRAs can have tax consequences. A Qualified Domestic Relations Order (QDRO) may be necessary to ensure that the transfer of retirement funds is not subject to early withdrawal penalties or immediate taxation. It's essential to consult a financial professional to navigate these complexities.
Spousal Support (Alimony) and Child Support
The tax treatment of spousal support changed as of January 1, 2019, due to the Tax Cuts and Jobs Act. For divorces finalized after this date, spousal support payments are no longer tax-deductible for the payer, and the recipient does not include these payments as taxable income. However, this only applies to agreements made after 2018, so it's crucial to understand the specific terms of your divorce agreement.
Child support payments do not have tax implications. They are not deductible by the payer and are not considered taxable income for the recipient. It's important to differentiate between child support and other forms of financial support, as the tax treatment varies.
Dependency Exemptions and Child Tax Credits
Divorcing parents in California often have questions about claiming dependency exemptions and child tax credits.
Before the tax law changes that took effect in 2018, dependency exemptions were significant for reducing a taxpayer's taxable income. However, these exemptions were suspended until 2025. The custodial parent (the one with whom the child lived for the greater part of the year) typically claims the child as a dependent, but this can be negotiated between parents in the divorce agreement.
Child Tax Credits
The Child Tax Credit can provide substantial tax relief for eligible parents. As of 2021, the credit is partially refundable and can reduce the tax bill by up to $3,600 per qualifying child under the age of 6 and $3,000 per child aged 6 to 17. The parent claiming the child as a dependent is generally entitled to this credit, but it's essential to ensure that both parents understand how it will be allocated.
Marital Home and Mortgage Interest Deductions
The marital home is often a significant asset and point of contention in divorce proceedings.
Sale of the Marital Home
If the marital home is sold as part of the divorce settlement, the couple may qualify for the capital gains exclusion on the sale of a primary residence. Under certain circumstances, each spouse can exclude up to $250,000 of capital gains from their taxable income.
Mortgage Interest Deductions
If one spouse retains ownership of the marital home and continues to pay the mortgage, they may continue to deduct mortgage interest as long as they meet the eligibility criteria set by the IRS.
Tax Planning with Moore, Schulman & Moore, APC
Tax planning is an important part of any divorce. When planning your divorce, you should be aware of how certain decisions made during the divorce process may affect your taxes. Our firm can help you plan for the tax consequences of asset division, alimony, and other decisions that affect your taxes.
Our firm can also assist with tax planning for your future. We can help you plan for retirement, college, and other important financial goals.
Certified Ten of our attorneys have earned the distinction of certified family law specialist.
Equipped Skilled in litigation and mediation, we are prepared to handle any type of divorce.
Attentive We respond quickly to clients and ensure they are always informed about their case.
Seasoned Our professionals have more than 200 years of combined family law experience.
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David Schulman Founding Partner & Board Certified Expert in Family Law
Erik Moore Founding Partner & Board Certified Expert in Family Law
Julie Westerman Partner & Board Certified Expert in Family Law
Jeremy Boyer Partner & Board Certified Expert in Family Law
Kevin Polis Partner & Board Certified Expert in Family Law
Lesa Christenson Of Counsel & Board Certified Expert in Family Law
Bryan Yerger Associate
Sarah Bear Associate
Jillian Minter Associate
Isabel Steinmetz Associate
Lindsey Dentino Associate
Lauren Haack Associate