Divorce has important tax consequences that can affect your emotional and financial well-being. Understanding how a high net worth divorce can affect your taxes in California may help you avoid unexpected costs and make better decisions about your future.
Hire a Hire Net Worth Divorce Lawyer to Represent You
Ms. Rogers of Dorie A. Rogers, APC, has over 30 years of professional experience. She uses that knowledge to help new clients understand the most favorable options available in their unique case.
When you come in for your consultation, you’ll be greeted by a lawyer who puts empathy and efficiency at the forefront. You’ll explain the details of your situation and your desired outcome. From there, Ms. Rogers will work tirelessly to fight for your rights.
What Is a High Net Worth Divorce?
In 2023, approximately 2,727,563 men were divorced, and 3,896,519 women were divorced in California. In a state where the cost of living is 50% higher than the national average, many of these residents experienced a high-income divorce.
A high net worth divorce is one involving one or both spouses who earn substantial income or have significant assets. This can be more complicated than a regular divorce. These divorces often include:
- Expensive real estate
- Investment accounts
- Retirement plans
- Business interests
In California, the average household income in 2023 was $96,334. The average home value was $695,400. Because of the complexity of assets, high-income divorces usually require detailed financial analysis and careful tax planning. It’s important to hire a high net worth divorce lawyer to help you navigate your specific situation.
Tax Considerations During Property Division and Alimony in a California Divorce
Spouses can divide their property during mediation. This process is a private alternative to court that helps save time and money. During mediation, a professional mediator helps both sides communicate and reach an agreement on their divorce issues. Any property gained before marriage is generally not divided between spouses. Anything gained during marriage, such as income or debt, is subject to division.
If issues can’t be resolved during mediation, they will be escalated to court, where a judge will have the final say. California courts divide marital property equally. This often runs counter to the couple’s wishes, making successful mediation all the more important.
When people go through a separation or divorce, their tax situation changes. For tax purposes, a couple is married until their divorce is finalized, according to the IRS. After separating, individuals usually need to update their tax withholding by submitting a new Form W-4 to their employer. They may also need to make estimated tax payments if they receive alimony. Alimony payments have specific tax rules. For agreements made after 2018, these payments are:
- No longer deductible for the person paying
- Not considered income for the person receiving
Filing Tax Status for Divorcing Couples in California
When filing your taxes, your filing status depends on your marital status at the end of the year. Couples still married must choose between filing jointly or separately. Joint filing typically results in lower taxes. Separated individuals may qualify for head of household if:
- Their spouse didn’t live with them for the last six months of the year
- They pay more than half the household costs
- Their home is the main residence of a dependent child
After a divorce is finalized, most people file as single unless they qualify as head of household or remarry by the end of the year.
Selling a Home After Divorce
While property transfers don’t have tax consequences, capital gains taxes may apply. When you sell your main home, you may be able to exclude some profit from your taxes. You can exclude up to $250,000 of the gain if you file your taxes as single.
To qualify, you generally must have lived in the home as your main residence for at least two of the five years before the sale. These two years don’t have to be consecutive. You also can’t have used this exclusion for another home in the two years before the sale.
FAQs
How Are Child Support Payments Treated for Tax Purposes?
Child support payments are treated very differently from other types of financial support for tax purposes. They are never considered taxable income for the parent who receives them, which means you don’t report them as income on your tax return. The parent who makes the payments can’t deduct them from their own income.
This is true whether the payments are made voluntarily or as part of a court order. This rule applies regardless of the amount or frequency of payment.
Do I Have to Pay Taxes on Alimony I Receive From a Divorce Agreement Finalized Before 2019?
For alimony agreements finalized before 2019, the person receiving alimony generally must report it as taxable income. The person paying it can usually deduct it from their own taxable income. This means the recipient’s taxes may increase, while the payer’s taxable income may decrease.
For alimony agreements made after December 31, 2018, or for agreements made before 2019 but later modified to follow the new rules, alimony payments are essentially neutral for tax purposes.
Is My Ex Entitled to a Portion of My Retirement Account?
When someone gets divorced, their ex may be entitled to a portion of their retirement account. How and when the ex can access these funds depends on the type of retirement plan and the amount of benefits. Sometimes the ex can access their share immediately, but often they must wait until the participant retires or passes away.
What Is a Forensic Accountant?
A forensic accountant is usually needed to help untangle finances. Divorces involving high net worth couples can be complex due to the large and complex financial assets involved. The accountant evaluates businesses, investments, and other assets to determine their true value. After completing the analysis, a forensic accountant can provide detailed reports and recommendations to help lawyers and parties make informed decisions about settlements.
Experienced Divorce Attorney in California
Reach out to Dorie A. Rogers, APC, today to schedule your consultation with Ms. Rogers. Divorce can be one of the most difficult things a person can go through. No one gets married expecting to later divorce.
For high-income couples, their assets can easily become intertwined over the course of marriage. When trying to understand the most favorable options for you, working with a competent attorney is key.
