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Specialty tag(s): Divorce

November 18, 2022

Women on a sofa examining tax documents

Divorce is often one of the most chaotic and emotionally challenging times in one’s life. With all the meetings to attend and disputes to settle, it’s understandable that taxes may not be a high priority for you at this time. However, it’s still something you’ll want to give considerable thought to while going through a divorce.

The reason for this is that divorce and taxes are intrinsically linked. How and when your divorce unfolds can have significant tax implications that may impact your finances for years to come. If you’re going through a divorce, there are several tax repercussions you should be aware of moving forward and when preparing for tax filing.

1. Timing and Filing

If your divorce has not been finalized by the last day of the taxable year (December 31st) you and your spouse will still legally be considered married by state law. Should this be the case for you, you and your former spouse will need to determine how you want to file.

The two main options in this situation are “married filing jointly” or “married filing separately.”

Many of those dealing with a divorce and taxes at the same time choose to file jointly because it generally has the largest return and smallest liability. However, those considering this option should be aware that filing jointly makes both parties equally liable for any fraudulent claims made on the report. If your ex-spouse doesn’t file your taxes completely accurately, you could incur penalties due to their mistakes.

Filing separately allows each spouse to be responsible for their own taxes. Reporting only your income, exemptions, deductions and credits may result in a lower return/higher liability, but it also lets you avoid any problems that may arise from trusting a spouse to file on your behalf.

2. Dependent Claims

If you and your spouse have children, it’s important for you to understand that each child can only be claimed by one of you each year. IRS rules generally stipulate that the parent who has custody of the child/children for the majority of the year can claim the Child Tax Credit, but this isn’t always the case. Parents of a single child will sometimes alternate who claims the dependent each year, and parents with multiple children will often split up the claims between them.

3. The Transfer of Property/Assets

The transfer of assets during a divorce is usually treated as a non-taxable event. However, certain situations such as the selling of assets awarded through divorce may result in tax consequences. This is most commonly the case for spouses who shared high-value assets or owned a business. If this is the case for your divorce, it’s prudent to have an accountant or tax attorney review your settlement before you sign.

4. The Transfer of Retirement Assets

Retirement accounts can be incredibly high-value assets and most divorce settlements include terms as to how those accounts should be divided. Generally, withdrawing funds from retirement accounts results in large tax penalties, but this isn’t the case with divorce. Per the Employee Retirement Income Security Act (ERISA), retirement funds can be withdrawn from an account for transfer to a non-employee spouse without penalty, as long as it’s specified by a qualified domestic relations order (QDRO) issued by a court.

To avoid unnecessary tax penalties, it’s best practice to send a draft of the QDRO to the retirement plan administrator so that they can verify that it has met the required specifications.

5. Alimony Payments

Per the Tax Cuts and Jobs Act of 2017, any alimony payments made as part of divorce agreements finalized after January 1, 2019, are not considered taxable income for the spouse receiving the payments or deductible for the spouse making the payments. Spouses who made divorce agreements regarding alimony prior to this date can still claim the deduction.

6. Child Support

Child support payments are not considered taxable for the spouse receiving the payments or deductible for the spouse making the payments.