Now that this year’s tax season is official over (hopefully) for most California readers, tax and law experts know that it is time to start looking ahead and planning for what is to come. This might seem like an unwelcome task at the moment when you thought it was time to set taxes aside for a while, but there are some situations that require extra attention and planning, so it is better to start sooner than later.
One of those situations is getting a divorce. Divorce brings up a lot of new financial challenges from dividing assets to paying spousal support to figuring out what to do with a shared 401(k) account. All of these elements have tax implications that will make a very big impact on income tax filing the year following a divorce.
For example, did you know that spousal support payments are taxable income? Many people receiving these payments fail to keep that issue in mind from the start and do not set aside sufficient funds to cover their tax bill when it arrives the next year. For most people who have earned their income at a job that withholds taxes during the year, the shift from getting a refund to owing taxes is an unwelcome one. Planning ahead and calculating potential tax liability early can help prevent a financial crisis later.
These issues and how to properly address them are part of a conversation that people going through a divorce will want to have with tax law specialist and tax accountants, to make sure that they understand and properly prepare for their new tax situation.
Source: Reuters, “What's even worse than a divorce? For some, it's the taxes,” Lauren Young, April 10, 2014.