Divorce Can Impact Your Future Taxes
Divorcing couples generally have a lot on their minds when going through the divorce process, particularly if they have significant assets to consider. One thing they may forget to consider is the effect a divorce may have on their taxes. With a solid plan in place, you can better protect your finances and make sure that you do not end up giving the IRS more money than you have to.
First, as you and your spouse divide your assets, you should focus on the future cash implications as well as the current value of the asset. Even assets that seem equal right now may not be equal in the future. For example, a traditional and Roth IRA may have the same amount of money currently, but the traditional IRA will be taxed significantly in the future, while the Roth IRA has already been taxed. Therefore, whoever gets the Roth IRA is in a better position long-term.
Another thing to consider if you have children, is the dependency exemption. Prior to 2018, whoever was declared the “custodial parent” was eligible for the dependency exemption of approximately $4,000 per child, meaning that their taxable income was reduced. Under current tax law, the dependency exemption does not provide the custodial parent with any financial benefit, but keep in mind that the exemption will return in 2026. Also, parents who would normally be eligible for the dependency exemption may still be eligible for other credits depending on their level of income.
If you are expecting a tax refund, make sure to include that in your divorce negotiations, as well as any loss carry forwards (e.g. losses from previous stock or investment sales). Also, if you are still married and sign a joint return, you may still be held responsible for any underpayment of taxes, even after your divorce is finalized. Filing your taxes separately may be better for your long-term finances.