According to the American Psychological Association, more than 40% of marriages end up in divorce. That number is baffling, considering the implications of divorce. Your financial and living situation change and you might have to spend less time with your kids.
A lesser-known fact is that your tax filing status changes. You will be subject to a new set of rules when filing taxes. Understanding the rules governing tax in relation to divorce will help you make the best decision during your divorce process.
This article outlines how divorce changes your tax obligations. The divorce process gives you enough stress, and you do not want the IRS to come for uncleared taxes at your doorstep.
Here are 10 Facts You Need to Understand About Divorce and Taxes
1. The Date You Legally Divorce
Your marital status determines your tax obligations. However, if you are in the process of divorce, the question of whether you are married or single is straightforward.
According to the IRS, you are single if you signed divorce papers before the midnight of December 31 of the financial tax year. It will not matter if you spent most of the year married.
Once you finalize your divorce process by December 31, you will file tax returns for the tax year as a single person. If, however, the divorce process crosses over into the new year, you will file returns for the 2018 tax year as a married person.
Remember, you are still married until a court order states you are divorced or legally separated. And, there are benefits of filing a joint return, such as a much higher standard deduction.
2. Who Takes the Responsibility of Children?
According to IRS regulations, only one parent can claim dependents in any given tax year. If you have an even number of children, say two, claiming dependents is relatively easy – you and your spouse share the dependents equally when filing returns.
However, if you have an odd number of children, one spouse will have to claim more dependents than the other. Claiming the same dependent in one tax year could trigger an IRS audit, and consequently tax penalties.
If you and your spouse cannot agree on who claims the dependents, the IRS will decide for you. Typically, they give the right to claim a dependent on the parent who lived with the child for most of the year. Therefore, the right mostly goes to the custodial parent.
Also, you can only claim a child as a dependent if:
- You contributed 51% or more of their upkeep
- And, they are below the age of 19
- Or, below 24 and a student on a full-time basis
3. You Might Qualify for the Head of Household Status
The head of the household status requires you to:
- Have a dependent, who lived under your roof for more than six months. In most cases, the dependent is your child. However, other relatives such as your parents can qualify as dependents.
In the case of parents as dependents, you do not have to live with them to qualify for the status. You will, however, need to cater for 51% or more of their livelihood.
- Have the right to claim your dependent. Typically, this right belongs to the custodial parent. However, the custodial parent could transfer the right to you by signing form 8332 and submitting it to the IRS.
- File the returns separately. Filing a joint return denies both parties a right to claim the status of the head of the household.
If you could not finalize your divorce by December 31, you might still claim the status of the head of the household. The IRS might consider you unmarried in the previous year for as long as:
- You stopped living with your ex-spouse earlier than June 1
- You were responsible for more than 50% of the home maintenance costs
4. Child Support is not a Deductible Expense
Child support payments, in the opinion of many parents, seem like a deductible expense. But, according to the IRS, they are not. Why? If you had remained married, would you have claimed a tax deduction on the cost of taking care of your kids?
Child support is a personal expense, and it remains so even after divorce.
Child support payments are also not a source of income. As such, if you receive these payments, do not include them in your taxable income. In short, child support payments are tax neutral.
5. Alimony and Tax
The TCJA changed the regulations governing alimony (also knowns as spousal support or spousal maintenance). For divorces after December 31st, 2018, spousal maintenance is not tax-deductible for the individual paying. Similarly, it is not taxable income for the recipient.
However, the new regulation is not retroactive. That means, for couples divorced before December 31, 2018, the spouse receiving alimony has to pay taxes on the amount. The spouse paying alimony can list the payment under tax deductibles.
That said, if you deem the new rule favorable to you, the IRS allows you to revise the previous decree and adopt the new guidelines.
6. Divorce Costs are not Tax-deductible
The divorce process is long and expensive. You have to negotiate for settlement, alimony, child support, and many other proceedings. Some of these processes may lead you to hire sexual assault lawyers. All these court proceedings will cost money and attorneys are not cheap. The question is, can you deduct divorce-related legal fees from your tax liability?
Legal fees are not and have never been deductible. However, before the new TCJA regulations, you could deduct legal expenses that resulted in income generation, such as the fees associated with an alimony proceeding.
The TCJA viewed such fees as miscellaneous itemized deductions and removed them from the tax code. Until the revision of the new TCJA regulations in 2025, do not bank on any tax exemption as a result of divorce proceedings.
7. Property Taxes
First, if you keep the home, you have to pay the mortgage on your own. Then there is the issue of property taxes.
Fortunately, you do not incur taxes on property transfer. Under the Internal Revenue Codes, property division as a result of divorce is not taxable.
Unfortunately, if you decide to sell the home, you might have to pay capital gains tax. The current house value determines the capital gains tax. So, if your home has dramatically appreciated since you bought it, you will have to pay a large amount of capital gains tax. But you will only pay capital gains tax if your home has appreciated by more than $250 000.
8. Retirement Benefits and Plans
Did you and your spouse have any shared retirement plans? How do you plan on sharing them after the divorce? How you choose to go about the sharing of retirement assets might affect your taxable income.
A possible option is for one spouse to give retirement money to the other. But that is a wrong decision, at least tax-wise. The IRS will deem that money a taxable distribution.
If you decide to share retirement benefits, you will have to wait until after retirement. The best option is to ask the court to serve a QDRO (qualified domestic relations order). Such an order will instruct the pension plan provider to pay a portion of the pension to an alternate payee; in this case, the ex-spouse.
9. A Divorce Could Affect Your OIC Agreement with IRS
IRS offer in compromise is an agreement between an individual and the tax regulator to reduce the tax burden. However, to qualify for an OIC, you should have an excellent reason, such as evidence there is an error in your tax liability.
When reviewing your OIC, the IRS also looks at your current income stream, as well as your tax profile.
Your income is a significant factor in your tax profile. Therefore, if you receive a massive amount in a divorce settlement, there will be a considerable change in your tax profile. And, as a result, the IRS might review your OIC.
The point is, during the divorce process, think about how negotiating a substantial settlement might affect your OIC. Make sure to talk to your divorce lawyers about your current OIC agreement with IRS, and the possible tax liabilities of a huge settlement.
10. Name Change and Filing Tax Returns
After divorce, women who took their husband’s names prefer to go back to their original surnames. If you change your name, make sure you alert the Social Security Administration as soon as possible.
When filing returns online, your records in the IRS have to match the SSA records. Otherwise, the system will reject the returns. Then you will have to file a manual return, which will most likely result in delayed tax refunds.
A divorce is a complicated process. However, you can make the aftermath of divorce less stressful by learning about all the possible changes, which include changes in your tax obligations and liabilities. Now people can easily settle IRS taxes Sacramento by giving a lump-sum amount to the government. After learning the essential things you should know about divorce and taxes, you can now decide with your spouse on what move to take to benefit both of you.
Rebecca Siggers has been closely studying the Legal industry trends from quite some time. Intrigued by the booming growth of this sector, she takes interest in penning down her views providing quality insight on current issues and also likes to write about tax and law.