Tax Implications of Divorce in Indiana: An Overview

The tax implications of divorce in Indiana can be anywhere from non-existent to quite expensive, depending on your families circumstances both before and after the divorce. Income and property taxes are the two main taxes paid by the majority of taxpayers and are dependent upon the situation of the taxpayer. As that situation changes, so do the tax consequences. Property distributions which include a pension plan may also result in tax implications that should be considered. This blog explores the tax implications of divorce in Indiana and provides an overview of various tax matters. 

Income taxes are the most common type of tax most are familiar with and required to pay. However, many taxpayers do not prepare their own income tax returns, choosing instead of hire a certified public accountant, IRS enrolled agent, attorney, or tax preparation chain, such as H&R Block, to prepare and file their returns for them. This can result in a lack of knowledge about how deductions and credits work on income taxes and in turn, how divorce may affect an income tax return. In order to fully understand Indiana income taxes, one must first become familiar with federal income tax returns, which must be completed before state tax returns can be prepared. 

The federal income tax return form used by the large majority of taxpayers is IRS Form 1040. The form requires that you list your dependents and their relationship to you. Each dependent listed could enable the taxpayer to claim either a deduction, a credit, or both, depending on the age of the dependent and their relationship to the taxpayer (Department of Treasury, Internal Revenue Service. (2023, January 20). 2022 instruction 1040). This is where married couples list all of the children they have together. After a divorce, however, only one parent may claim a particular child for each tax year. Court orders regarding who may claim which child during what years will be included in your final decree. If there are years when you are unable to claim any of the children as your dependents, you may see an increase in the amount of taxes you owe, which will decrease your tax refund check. The reverse is also true: in years when you can claim some or all of your children, you may see a decrease in the amount of taxes you owe, and an increase in the amount of your tax check. 

Many parents who spend a majority of the marriage taking care of household and childcare responsibilities find that after a divorce they must accept fairly low paying employment due to time spent out of the workforce and/or lack of training and education. These parents may qualify for the earned income credit, or EIC, which gives them a credit for paying in taxes through-out the year that they actually did not. This commonly results in a tax refund the taxpayer would otherwise not have received, or a larger refund than they would have received without the credit (Earned income tax credit (EITC). Internal Revenue Service. (2023, July 26)). The EIC may also be claimed on Indiana state tax returns if the taxpayer claimed it on their federal returns. However, the biggest change divorced taxpayers will see, whether on their federal or state tax return, will be based on the loss of reported income attributable to their former spouse. The lower income will put the taxpayer in a lower tax bracket, thereby lowering the amount of tax due, which if over-paid through-out the year, will increase the amount of their tax refund check. 

The second most common type of tax paid by taxpayers is property tax. When a couple owns real property, divorce can cause, perhaps unforeseen tax implications, for the party keeping any of the property. Real property that is mortgaged may cause property taxes to simply be overlooked, as these taxes are oftentimes included in the mortgage payment. However, when taxes must be paid outside of a mortgage, the tax payments may be high enough that one or both of the parties do not wish to keep the property. Parties who own more than one piece of real property also need to consider the homestead exemption, which greatly reduces the property tax on real property which is a parties primary residence (Department of Local Finance. (2018, November 1). FAQ homestead standard deduction. State of Indiana). 

Finally, divorce may result in tax implications where taxes are not currently being paid when a property distribution order divides one of the spouses pensions between the parties. Depending on the type of pension, the language of the court order, and when the spouses share of the pension is to be paid, the party owning the pension may find themselves paying the taxes on both theirs and their spouses share of that pension (Maxwell v. Maxwell, 163 N.E.3d 337 (Ind. App. 2021)). Because of the tax implications of divorce in Indiana and how quickly laws may change, it is always best to consult with an attorney or other tax professional in order to determine what tax issues may be involved in your divorce, and how best to handle those issues.

This blog was written by attorneys at Ciyou & Associates, P.C. It is for general educational purposes. The blog is not intended to be relied upon for any legal matter or issue. The blog is not legal advice. This is an advertisement.


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