Divorce is a complex process, and one aspect that often gets overlooked until it is too late is the tax implications. In Indiana, as in all states, divorce can have significant tax consequences that affect both parties for years to come. Consulting with an experienced attorney can help you understand the tax implications associated with your divorce specifically. This blog will address key tax considerations for those going through a divorce in the Hoosier State.
In Indiana, property transfers between spouses as part of a divorce settlement are generally not taxable events. Transfers of property between spouses due to divorce are typically not subject to capital gains tax. However, future sales of these assets may have tax implications. Be aware of potential differences in basis (original purchase price) when dividing assets. The Tax Cuts and Jobs Act of 2017 changed how alimony is taxed for divorces finalized after December 31, 2018. For post-2018 divorces, alimony payments are not tax deductible for the payer, and alimony received is not taxable income for the recipient. For pre-2019 divorces, the old rules still apply: payments are deductible for the payer and taxable for the recipient.
Child support payments have no tax consequences in Indiana or federally. Payments are not tax-deductible for the payer and payments are not taxable income for the recipient. While the personal exemption has been eliminated until 2025, the right to claim a child as a dependent still affects other tax benefits. Only one parent can claim a child as a dependent each year and this affects eligibility for credits like the Child Tax Credit and the Earned Income Tax Credit. Parents can agree to alternate years or divide children for tax purposes.
Your marital status on December 31 determines your filing status for the entire tax year. If divorced by December 31, you must file as a single or head of household. If you are still married on December 31, you can file jointly or married filing separately. Dividing retirement accounts in a divorce can have significant tax implications. 401(k) and traditional IRA require a qualified domestic relations order (QDRO) for tax-free transfer and withdrawals are taxable income for the recipient. Roth IRA can be transferred tax-free in a divorce and future withdrawals remain tax-free if requirements are met.
Special considerations apply to the sale of a primary residence during or after divorce. Up to $250,000 of capital gains can be excluded for a single filer and up to $500,000 can be excluded for a couple filing jointly. Timing of the sale and occupancy requirements can affect tax treatment. If one spouse buys out the other’s interest in a family business, it can trigger tax consequences. Valuation of the business is crucial, and the structure of the buyout can affect tax implications. Consider consulting both a tax professional and a business valuator.
If one spouse was covered under the other’s employer-provided health insurance, premium payments for ex-spouse’s coverage may be deductible alimony under pre-2019 rules. COBRA coverage is available but can be expensive and it is taxable if paid by the ex-spouse. Be aware of potential liability for joint returns filed during the marriage. It is advisable to consult with a tax professional. The interplay of divorce and taxes is very complex, and a tax professional can provide invaluable guidance. Consider tax implications when negotiating your divorce settlement and maintain detailed records of all financial transactions related to your divorce. A skilled mediator can help you and your spouse navigate tax issues collaboratively. Look at joint returns from the past few years to understand your tax situation fully.
The tax consequences of divorce in Indiana can be significant and long-lasting. While it may seem overwhelming, understanding these implications can help you make informed decisions during your divorce proceedings. Always consult with both a family law attorney and a tax professional to ensure you are considering all aspects of your financial future post-divorce. Remember, tax laws can change, and individual circumstances vary greatly. This overview provides a starting point, but personalized professional advice is crucial for navigating the complex intersection of divorce and taxes in Indiana. The attorneys at Ciyou & Associates, P.C. have a long history of practicing family law and navigating the tax implications associated. We are here to help you. This blog was written by attorneys at Ciyou & Associates, P.C., and this blog is not intended as specific legal advice or solicitation of services as this is an advertisement.