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How taxes are affected by a divorce

On Behalf of | Jan 3, 2020 | Divorce

People who are getting a divorce might need to consider how their taxes will be affected. While they will need to determine whether they are eligible to file as married or single, there are also a number of other tax-related issues they should be aware of. This should include understanding California law as well as federal law.

The passage of the Tax Cuts and Jobs Act of 2018 means that people who pay alimony cannot deduct it from their federal taxes although some states do allow deductions. Parents also no longer have to decide who will take the dependent exemption as it has been eliminated. Both state and federal laws might also govern how some assets are divided. For example, in order to divide 401(k)s and some other retirement accounts, it is necessary to have a document called a qualified domestic relations order. However, this is not needed with an IRA although there may be other considerations to avoid penalties and taxes.

People may want to time the sale of certain assets to reduce tax liability. For example, if a couple sells a home while still married, they may face a more favorable tax situation in regards to capital gains taxes than if they are both single at the time.

Since California is a community property state, property is supposed to be divided equally in a divorce unless there is a prenuptial agreement that specifies otherwise. In practice, even in a high-asset divorce, this does not necessarily mean that everything must be divided 50/50, whether the individuals reach an agreement through negotiation or if they go to court where a judge will decide. However, if each person is going to keep assets of equal value instead of dividing them, they should make sure that they consider taxes and other associated costs in assessing their value.