Arizona Divorce and Important Tax Questions to Consider
You already have enough on your plate – getting a divorce will be time-consuming, challenging and even confusing. You have to think about child custody, the separation of assets and living arrangements in the future. This is why you may overlook one very important aspect of getting a divorce – tax issues. In Arizona divorce and important tax questions to be considered are – Should you file a joint return while divorce proceedings are ongoing? Who will claim the children for Income Tax Dependency Deduction? Are there any exemptions?
Arizona Divorce and Important Tax Questions – Filing During a Divorce
The day on which you obtain your divorce decree is the one that will determine the manner in which tax filing is going to take place.
If the decree is not obtained by December 31 of the respective year, the couple is still considered married. Thus, joint filing can occur. A divorce that is finalized before the end of the financial year will have the couple being considered as divorced for the entire duration of the year. In this situation, the two former spouses cannot file jointly.
Anyone who is currently in the middle of a divorce and worries about filing should have a discussion with a tax professional. You can inquire about joint filing, as well as about the allocation of any refund amount owed. Local regulations will also have to be understood in detail.
Arizona is a community property state. This means that all income earned during the marriage is considered joint until the marriage is dissolved. Thus, in tax returns, you have to list half of the household income (when filing separately), regardless of which spouse has earned the income.
Arizona Divorce and Important Tax Questions – Property Division
Property and asset division during a divorce is also going to have an effect on taxes from that point forward.
For a start, Internal Revenue Code 1041 states that the division of assets during a divorce is not considered a taxable event. The tax basis, however, will more than likely change in the aftermath of such asset and property separation.
Tax basis is defined as the price used to determine capital gains upon the sale of the said property. Cash carries no capital gains. A residence is exempt from capital gains. These are important financial specifics to know and keep in mind.
Arizona Divorce and Important Tax Questions – Exemptions
When considering taxes, you will also have to focus on tax exemptions after the divorce and the individual that will be entitled to those.
As far as tax exemptions go for dependent children, they will usually go to the parent that has primary custody. Alternatively, the parent that has the child living with them for more than half of the year will be the one to claim the exemption.
If former spouses would like to get a different arrangement, they can file Form 8332 – Release/Revocation of Claim to Exemption for Child by Custodial Parent. The document will have to be signed by the custodial parent. Such a scenario, however, isn’t very likely because the tax exemption for dependent children can produce a massive reduction in taxes.
Spousal maintenance and child support are also a common source of questions pertaining to tax exemptions. Spousal maintenance is tax deductible because it is considered a source of income for the recipient and an expense for the spouse that is providing the maintenance amount.
Child support payments, on the other hand, are not tax deductible. They are not considered a source of income for the recipient, which is why they will not have an impact on the taxation amount (unlike alimony payments that will have a tax increase effect, especially if the sum is large).