Whether you are currently considering filing for a divorce in Louisiana or are already in the middle of the process, there are some critical tax issues you should be aware of. Every decision you make, including child custody, alimony, child support, and, of course, division of assets and debts, carries some tax liabilities.
Tax filing status
For starters, you must change your tax filing status from joint to either married filing separately or single, depending on the date of your divorce. This means that some tax benefits you were enjoying, like the head of the household status or the joint return deductions, are no longer available for you. It also implies that the IRS will separately hold each of you responsible for any interest and penalties due on your taxes.
If you and your spouse have children, various tax benefits are available for both of you. The primary custodial parent usually claims the child as a dependent on their tax return, but the noncustodial parent can also enjoy certain deductions. Generally speaking, if the custodial parent releases their right to claim the child in their income tax return, the noncustodial parent becomes eligible for that deduction. Such deductions include claiming Head of Household status and obtaining a portion of Child Tax Credit and Earned Income Credit (EIC).
Alimony or spousal support payments
Alimony or spousal support payments may be taxable and deductible depending on the payment type and its source. In Louisiana, spousal support payments are taxable to the recipient as additional income while they are deductible by the payer.
Taxation on property division
Regarding your assets and debts, the IRS will treat any property you sell within two years of the divorce as a short-term capital gain; thus, you will have to pay taxes on those gains. Furthermore, the transfer of retirement assets between spouses is generally not taxable, but they remain subject to taxation when the recipient spouse withdraws money from the account.
The most important thing regarding divorce-related tax matters is early planning. You must be proactive and know the tax rules that apply to your situation to make informed decisions. Moreover, you should keep track of all documents related to your divorce, including property division and alimony or spousal support payments, as they will help with filing taxes.