NEW YORK, March 30, 2023 (Newswire.com) - Credello: Divorce is rarely easy, and its implications on your finances can be complex. Here's a look at the main tax consequences of divorce for you and your ex-spouse.
If you and your ex had children, one of you would likely need to pay child support to the other. Child support is not a tax-deductible expense for the parent paying, nor is it considered income for the parent receiving it.
Child support impacting credit is only applicable when the parent assigned to pay is unable or unwilling to make payments. If this is the case, the courts will require unpaid support payments to be put on credit reports under the "number of on-time payments" metric. Since this is the highest-weighted factor of credit scores, missing child support can significantly impact your credit score.
Determining custody of the child can also affect your taxes. Whoever has primary custody can list the child as a dependent on their taxes, and the other cannot. If custody is split fifty-fifty, the parents must decide who gets to claim the child on their taxes, as they cannot both make the same claim (assuming they're filing taxes separately). If the parents can't come to an agreement, the IRS has "tie-breaker rules" via Publication 504 to help determine which parent should claim the child.
The IRS recently updated the way alimony payments affect your taxes, so it depends on when your divorce or separation began. If you have legally separated or divorced on or before December 31, 2018, alimony is tax deductible and may be considered income by the recipient.
If you divorced or had your separation agreement modified after December 31, 2018, then alimony payments are neither tax deductible nor considered income, but the recipient may need to make estimated tax payments depending on their withholding status.
Alimony payments can also affect your credit score in the same way child support can. If you fail to make payments, the courts may require that to be shown on your credit score until you're up-to-date.
Division of assets and property
According to the IRS, there is "usually...no recognized gain or loss on the transfer of property between spouses, or between former spouses if the transfer is because of a divorce..." but your accountant may require you to disclose the transaction on a gift tax return if the value is high enough.
Once divorced, you should update your withholding status with your employer to ensure your taxes are correctly deducted from your income. Your employer will give you a W-4 form to fill out that updates your filing status and adjusts your tax withdrawals.
Does divorce affect my credit score?
In addition to taxes, many people worry about their credit scores and the toll a divorce can take. The good news is that your relationship status is not a factor in your credit; the accounts you maintain are the only focus.
Divorcing a partner does not remove your obligation for any debts with your name on it, though, so joint accounts will need to be taken care of. If you need to close an account, it may affect your credit utilization since the total available credit will decrease, but this is easy to overcome by simply getting a new credit card in your name only. And if you run into any issues where your spouse's sole debt looks like your responsibility, disputing something on your credit report won't hurt your score or lower your chances of applying for new accounts.
The bottom line
Divorces are stressful enough, never mind the financial implications they can cause. Knowing the ins and outs of how separating from your spouse affects your taxes and credit can make things a little less daunting, so be sure to ask your accountant or lawyer for guidance that's specific to your circumstances.
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Original Source: Credello: How Divorce Impacts Your Taxes
Lifestyle - JISIP NEWS originally published at Lifestyle - JISIP NEWS