Thinking of all possible matters that must be addressed while going through a divorce is nearly if not completely impossible. Fortunately, you don’t have to think of everything. The family and tax attorneys at Camden & Meridew, P.C. can help assess your situation and work to plan for tax consequences in an Indiana divorce.
From questions about filing tax returns during divorce or separation proceedings to the implications of property division and taxes, a Carmel Fishers divorce lawyer at Camden & Meridew has the answers to your questions. We will help you anticipate what you need to know and do to successfully navigate a divorce and its resulting tax implications.
Questions about Tax Consequences in an Indiana Divorce
You may be surprised to learn that the end of a marriage can have unanticipated tax consequences. If your divorce case is pending when you would normally be filing taxes, one of the initial questions you might have is what filing status to use. Your divorce or tax attorney can help you look to the Internal Revenue Service (IRS) regulations as well as state law for assistance in anticipating the tax consequences in an Indiana divorce.
IRS Publication 504 helps divorced or separated individuals determine their proper status when filing tax returns both during a divorce or separation and after finalization. In most cases, you are considered unmarried for the whole year if you obtained a final decree (not an interlocutory decree) of divorce or separation as of the last day of the year.
If you have not yet received a final decree, consult with your attorney about whether to file jointly, as married filing separately, or as head of household. If you file jointly, be sure your divorce decree indicates how tax obligations or refunds will be divided. In a contentious situation, filing jointly might not be an option even though filing separately can cause you to miss out on some tax advantages if you have children.
Allocation of the Child Tax Exemption
A common question in divorce proceedings is who gets to claim the child tax exemption available under 26 USC § 152. A few factors come into play to that question:
- Age of the child (under 19 or a student under 24);
- Where the child spent the greatest number of nights during the year; and
- Which parent is custodial and which parent is noncustodial.
Effective July 1, 2021, the child tax credit that would be claimed on your tax return is, instead, paid monthly (beginning in July 2021) with the payments advanced to the parent whose bank account is on file.
For divorced parents who alternate the child tax exemption, this could create a need for one parent to reimburse the other.
For parents whose divorce is not yet final, this complicates how to allocate the exemption.
Regardless of whether you’re already divorced or your divorce is still pending, consultation with an attorney whose practice focuses on both family and tax law can help you avoid unnecessary confusion and problems regarding the child tax exemption.
The Effect of Child Support on Taxes
An individual who pays child support does not receive a tax deduction for those payments. For the recipient, child support payments are not included in gross income for taxation purposes; that is, they are not taxable to the parent receiving support on behalf of the child.
Property Division and Taxes in an Indiana Divorce
When property is transferred between spouses as part of a divorce, there is no gain or loss for taxation purposes. However, property division and taxes in divorce are often more complicated than this.
When assets such as homes, investment properties, stocks, bonds, or mutual funds are transferred elsewhere (not between spouses) as part of the divorce, the transfer may trigger capital gains or losses that must be reported for tax purposes.
Some taxes may be avoided if, for instance, the family home is sold in the divorce. Similarly, if one spouse stays in the home, both parties may avoid paying taxes up to a certain limit if the future sale of the home results in a financial gain.
Gains and losses can impact tax returns for future years, so it is important to carefully plan property transfers incident to the divorce and how any gains or losses are formalized in the final divorce decree.
2021 Case Law Regarding Tax Consequences in an Indiana Divorce
In 2021, case regarding tax consequences in an Indiana divorce made the news. In Maxwell v. Maxwell, a husband appealed the trial court’s division of property, arguing that the court failed to take into account the potential tax implications of his pension, effectively resulting in his former wife receiving a larger share of the marital estate than intended as a “just and reasonable” distribution.
On appeal, the Court of Appeals of Indiana sent the case back to the trial court for consideration of all relevant tax consequences of the court’s division of marital property pursuant to Indiana Code § 31-15-7-7. A dissenting judge, however, noted that immediate tax implications from the trial court’s disposition of the property did not exist and contended that the calculation of taxes to be paid in the future was too speculative.
This is a case to watch because the traditional interpretation of Indiana Code § 31-15-7-7 may take a turn as a result of this decision. The Carmel Fishers divorce lawyers at Camden & Meridew are monitoring this case and its impact on our clients.
Understanding the Innocent Spouse Rule in Indiana
Every divorce is unique, and tax matters are often complicated. If your soon-to-be-former spouse has improperly reported items on a joint tax return, you need to know your rights and responsibilities under Indiana law. A Carmel Fishers divorce lawyer can review your situation to determine whether you might be able to argue for application of the innocent spouse rule as a defense.
Call to Learn More about Tax Consequences in an Indiana Divorce
Carmel Fishers divorce lawyer Julie Camden at Camden & Meridew, P.C. has significant experience in both family law and tax law. At a time when you have not only a divorce to think about but also the difficult tax implications to consider, it is crucial to have a resource who understands all applicable areas of the law. To get the help you need with tax consequences in an Indiana divorce, call Julie today at 317-770-0000 or complete our online contact form.