Demystifying Taxes and Divorce

It's tax day and it seemed no better time than to address tax implications of divorce and things to be aware of and consider.

Understanding Tax Implications of Divorce:

• Filing Status: Your filing status for the tax year of your divorce depends on your marital status on December 31st of that year. If you are still legally married on that date, you can file jointly or separately (married filing separately). Therefore, even if you have an ongoing divorce (which may be hostile and involve little to no communication with your spouse), you still need to coordinate how you file your taxes (MFJ or MFS). This becomes a personal decision for each couple. Some choose whichever is the most financially advantageous, while others prefer to file separately no matter what due to a breakdown of trust or desire to start separating things out as soon as possible. If there are kids and you are filing separately, you will need to coordinate who will take the child on their taxes or if there are multiple children how (or if) they will be divided between each party's respective returns. If you and your spouse are having difficulty communicating and cannot agree on how taxes will be filed amongst yourselves, you can utilize the assistance of your divorce attorneys or a divorce mediator to help you work it out. Once your divorce is finalized, you can then choose single, head of household, or qualifying widow(er) for subsequent tax years.
• Property Division: The division of marital assets and debts can have tax consequences. While many assets being divided due to a divorce do not have tax consequences--including retirement accounts if done properly (such as utilizing a qualified domestic relations order ("QDRO")). There can be situations where tax consequences occur such as capital gains taxes upon selling property or the transferring of retirement accounts if not done properly or if they are liquidated early. Be sure that you are consulting a tax professional to understand the specific tax implications of dividing your assets.
• Alimony: Alimony payments have different tax treatments for the paying and receiving spouses. Historically, alimony payments were deductible from the payer's taxable income and considered taxable income for the recipient. However, Federally that all changed for anyone who was divorced on January 1, 2019 or later. For all new divorces, alimony is no longer deductible for the payer and is not taxable for the recipient (like child support, as addressed below). How alimony is treated or taxed on a state level varies from state to state, so be sure to consult a qualified tax professional in your state to understand how alimony payments are handled in your state.
• Child Support: Child support payments are not taxable income for the recipient and are not deductible by the payor.
• Deductions and Credits: Depending on your circumstances, there may be other tax implications to consider, such as claiming children as dependents or claiming medical expenses. These are things that you should not only consult a tax professional on, but also details that you should include in any divorce agreement.

Pro-Tips for Managing Taxes During Divorce:

Taxes and divorce can be a complex process, but understanding the key considerations can help you make informed decisions and minimize your tax burden. Remember, this newsletter provides a general overview, it does not provide legal advice, and consulting with a qualified tax professional and legal professional in your area is crucial for personalized advice.