How may divorce affect my tax liability now and in the future?

On Behalf of | Mar 28, 2022 | Divorce

A divorce that requires selling property may include paying capital gains taxes on the sales proceeds. If you purchased real estate, it could belong to both spouses under Colorado’s equitable distribution statutes. Selling property generally requires dividing its net proceeds fairly.

Marital liabilities also divide based on fairness, but may not require splitting a tax bill in half. As noted by Kiplinger’s Personal Finance, spouses may negotiate a tax payment or deduction based on who paid the mortgage. Records showing how much each spouse contributed may help determine a fair division.

IRS exemptions and dividing tax liabilities

As noted by BusinessInsider.com, a judge may divide assets and liabilities evenly when spouses cannot agree on a fair settlement. To prevent a judge from increasing your tax liability, you may negotiate a division based on when you sell your home.

If one spouse contributed more towards mortgage payments, you may discuss each spouse’s fair share from its sale. According to IRS.gov, you may request an exemption from paying capital gains taxes when selling your main residence. If filing a single person’s tax return, you may exclude up to $250,000. Married filers, however, may exclude up to $500,000.

Single and Head of Household tax-filers

After a divorce, your tax filing status may change depending on if you remain single, take custody of your children or remarry. The IRS generally considers individuals as Single filers when their divorce became final before December 31. By taking physical custody of your children, you may file as Head of Household. Your children must, however, live with you for at least 183 days out of the year to qualify for tax credits.

Divorce may include an unexpected capital gains tax if couples agree to sell shared property. You may, however, negotiate a fair division of a tax bill as part of your divorce settlement.