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Tax implications of a divorce

When California couples get a divorce, there are a number of tax considerations they should keep in mind. If the divorce was finalized by the last day of the year, the couple should file their tax returns separately. Couples whose divorce was not yet final, even if they are separated, may file jointly or as married filing separately.

Parents of minor children should agree on who will take the dependent exemption. The custodial parent has the right to take the exemption but can sign a waiver that allows the noncustodial parent to take it. The parent who takes this exemption may also take the American opportunity higher education credit and the child credit. Deductions for the children's medical bills can also be taken by the parent who pays them.

One person might be required to pay alimony to the other. The payer can deduct the payment from taxes while the recipient must pay taxes on the amount, although this will change for divorces finalized after Dec. 31, 2018. Usually, people work out tax issues on shared assets during the divorce. However, if there is an asset that one person has kept and later sells, there might be a capital gains tax on the item.

In divorces involving significant assets, there might be a lot of property that must be divided and tax implications for that division. In California, most assets acquired after marriage are considered community property. This may also apply to the appreciation on assets that a person brings into a marriage. Therefore, even if only person was the primary earner in the relationship, there may be a complex process of property division. A 401(k) and some other types of retirement accounts could trigger a substantial tax bill along with penalties if not divided correctly.

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