Divorce involves a financial transaction between the separating spouses. It involves dividing your assets, debts and retirement accounts, as well as figuring out what to give or receive as alimony and child support. All these activities carry tax implications in Pennsylvania, so it’s important to understand them before making any decisions.
Your tax filing status
When you conclude your divorce in Pennsylvania, you will need to change how to file your taxes in the future. If you finalize the process by December 31st of a given year, it will no longer be possible for either party to file jointly-each must submit their return as single or head of household.
Consequently, you might not be able to benefit from credits and deductions, such as child and dependent care tax credit, earned income credit, American opportunity and lifetime learning credits and exclusion or credit for adoption expenses. However, you may qualify for other tax breaks if you can show that you provided more than 50% of the cost of maintaining your home for yourself and a dependent.
Dividing assets and liabilities
When divorcing, spouses must divide their assets and liabilities equitably according to the circumstances of their marriage. This split can also come with tax implications. For example, when dividing investment accounts, couples should be aware of capital gains taxes, which may be due on any appreciation. In addition, when dividing retirement accounts, couples should understand that the IRS can tax withdrawals.
Custody and child support
Regarding child custody, each parent’s filing status can affect the amount of child support payments and implications for claiming dependents on taxes. Generally speaking, the custodial parent—the one with whom the child lives most of the time—is eligible for tax benefits such as claiming any dependent-related credits or deductions.
Neither the federal nor Pennsylvania government recognize child support payments as a deductible expense for the payer or a taxable income to the recipient. So you don’t have to worry about any tax implications there; in fact, you don’t need to report child support payments when filing your taxes.
Understanding the tax implications of divorce is essential for making informed decisions that can save you time and money during and after divorce. Besides taxes, it may help to be aware of all the associated costs and legalities during this challenging process to protect your rights and interests as best as possible.