Let’s face it: many of us don’t give much thought to taxes until April is near. But if you’re getting divorced, neglecting to give your tax burden more than a passing thought would be a mistake. Before finalizing your divorce, you will need to meet with a tax accountant to understand your new reality as a single filer. This will be important information as you negotiate your final settlement.
Divorce is stressful enough without having to worry about the IRS; here are 10 things you ought to know about divorce and taxes:
1. The date your divorce is legal.
Your tax obligation will be determined by your marital status. The IRS says you will need to file as a single taxpayer if your divorce is final by December 31 of the financial tax year — even if you spent most of that year married.
2. Claiming dependents.
According to the IRS, only one parent may claim dependents in a tax year. If you have an even number of children, you and your ex can share them equally when reporting dependents on your own individual returns. If you have an odd number of children, you will need to decide which parent will be able to claim more dependents (you can alternate who claims more dependents if you have joint custody). If you can’t agree on a workable solution, the IRS will make the decision, which is usually in favor of the parent who spends the most time with the child/children (typically the custodial parent).
3. Head of household status.
If you are the custodial parent and your child lives in your home for more than six months of the year, you can qualify for head of the household status, which provides some important tax advantages over the single filing status.
4. Child support payments are tax neutral.
Child support payments are not a deductible expense for the payor, nor are they considered taxable income for the recipient. The IRS considers child support to be a personal expense, much as it would have been if you remained married.
5. Alimony tax rules have changed.
The tax rules for alimony changed in 2017 with the passage of the Tax Cuts and Jobs Act. Before the new law, the ex-spouse paying alimony was able to take a tax deduction on the amount of alimony paid annually and the ex-spouse receiving alimony had to declare it as income. Under the new law, the payer can no longer claim alimony as a deduction on their federal tax return, and the recipient does not have to declare alimony payments as income.
6. You can’t deduct divorce costs.
The IRS will not help you get divorced by providing tax deductions for the cost of doing so.
7. Taxes on property.
If you keep the house in your divorce, you will be responsible for paying property taxes as well as mortgage payments. Any property transfer does not incur a tax. If you decide to sell your home and it has appreciated in value by more than $250,000, you could be on the hook for capital gains taxes.
8. Retirement benefits.
If you and your spouse had shared retirement plans, the decision you make on sharing those retirement assets in a divorce could affect your taxable income. Splitting a qualified retirement plan or pension plan in a divorce typically requires the preparation of a QDRO (qualified domestic relations order). With a QDRO, administrators of your retirement plan or pension are officially notified that benefits are to be distributed according to a court order in a divorce action. Properly drafted, the order will address issues like survivor benefits so if the plan participant dies first the surviving spouse can be assured of continuing to receive funds.
9. Effect of divorce on OIC status.
An OIC — “offer in compromise” — is an agreement between the IRS and a taxpayer that settles a tax debt for less than the full amount owed. If you have an OIC and receive a large settlement as part of your divorce, the IRS could revoke the OIC because of the change in your income.
10. Name change.
Sometimes women will want to change back to their maiden name following a divorce. If that’s your plan, you will need to alert the Social Security Administration as soon as possible. When filing taxes online, your IRS records must match your SSA records or your return will be rejected.
You can rely on Murphy & Cistaro to skillfully negotiate and mediate your issues to a satisfactory resolution. Should the need arise, you can also count on our experience for being aggressive litigators if the situation calls for a more assertive response. Contact us today for your free consultation.