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Avoiding or limiting tax implications during divorce

The divorce process is often described as one that is difficult and complex. Part of that is because of the many considerations people need to think about during the decision-making process. Rhode Island couples going through a divorce or are considering a split understand that there could be tax liabilities based on the decision reached in the final decree. Just as divorcing couples seek to limit their post-divorce issues, it is also important to address any tax concerns during dissolution in order to prevent or minimize tax liabilities.

Divorcing couples should understand some basic rules in order to avoid tax implications. First, the couple would be considered still married for tax purposes if the divorce has not been finalized by December 31 of the tax year in question.

Next, if the spouses are filing separate returns, they should each report half of any community income. In addition, they should claim credit for half of the withheld tax income. However, a spouse should be aware that they are not responsible for the tax on the community income if they are not filing a joint return for that year, or all of the community income was earned by the other spouse and is not being included on a separate return.

When filing separately, divorcing spouses will estimate payments made jointly in order to divide them. If the couple cannot reach an agreement, the IRS will divide the payments proportionally based on the income reported on each spouse's return. If overpayment occurs, this will carry forward and be allocated by the IRS proportionally based on the spouse's income for the current year.

However, if an underestimation occurs, this could result in underpaid taxes, interests and penalties. Because both spouses are jointly liable on a joint return, it is possible for a spouse to become liable for the other spouse's tax liabilities.

When filing for divorce, it is not only important to consider tax filings for the current year but also the previous filing. Taking the time to itemize their property and incomes could help a divorcing spouse make appropriate and knowledgeable decisions. Those struggling with this and other divorce issues should seek guidance about their options.

Source: Examiner, "Divorce and taxes," Patricia Barrett, Jan. 31, 2015

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