Celebrity status or not, divorce carries tax consequences
If you’re getting divorced, there are probably a lot of things in your life that are changing. One of them of course is your tax situation.
In this post, we will review some of the tax considerations to be aware of. We’ll use the high-profile case of Angelina Jolie and Brad Pitt as an example because, as a Forbes commentator put it, many issues involving divorce and taxes don’t depend on how many digits appear on the line for your income.
We’ve addressed divorce and taxes before in this blog, but not recently. In our May 31 post, we discussed issues such as the tax break for dependent children and taxes on alimony or child support.
Let’s start with filing status. It seems likely that Jolie and Pitt will no longer file as a married couple. California law allows for legal separation, a status that involves a court order. And so, even if their divorce isn’t finalized yet, Jolie and Pitt will probably file as single taxpayers.
It would be different, however, if they were separated only under a preliminary (not a final) court order as part of the divorce process. This type of order is called an interlocutory order, and people who are separated under that status are considered married for federal tax purposes.
How about tax consequences from the division of property? The general rule is that there is no taxable gain or loss when property is transferred to a former spouse as part of a divorce settlement. The applicable section of the Internal Revenue Code is 26 IRC 1041.
In the case of Pitt and Jolie, there is a reportedly a prenuptial agreement in place that will govern the division of property. Pitt and Jolie will each leave the marriage with the property he or she brought in. And the income they made while married is apparently put in trust for their children.
These are only a few of the tax issues that can arise in a divorce. Amid all the emotions, things can also get complicated in terms of tax compliance. If you are uncertain about how your taxes should be handled, it’s important to talk with a knowledgeable about this area of the law.