Tax form business financial concept: macro view of individual return tax form and blue metal ballpoint pen
Written by Michael Juilfs

What are the tax concerns during divorce

Date:

Many people have tax concerns during divorce. As you adjust to the separation and dividing of assets, you may wonder what filing your taxes will look like. Further, you may have questions even after finalizing the divorce, especially if there are children, child support, or spousal support. Here are some tax issues and questions that may arise and how to handle them.

Prepare for Tax Concerns During Divorce

The first step to identifying and addressing potential issues and concerns is to have all the information. While it’s tempting to downplay income, debt, and assets, it’s essential that you remain transparent during the divorce process. Hiding things can come back to haunt you in the end.

When you are preparing to tackle the divorce, make sure all tax returns that can be filed have been (don’t just assume that they have been filed), and make sure your bookkeeping is up to date. Gather bank statements, loan documents, and any other important financial documents. Lastly, have all real property documents available as well.

Common Tax Concerns During Divorce

It’s normal to have a lot of questions surrounding taxes–most people have them even when there isn’t a divorce. However, during a divorce, things can become more muddled, and you want to make sure everyone is on the same page. Here are some basic points regarding taxes and divorce:

  • Child support – Child support isn’t taxable or tax deductible.
  • Alimony – Tax treatment of Spousal support has become more complicated based on recent changes to the tax code. Historically, spousal support has been taxable to person receiving it and deductible to the person paying it. This won’t be the case for divorce decrees finalized by the Court after December 31, 2018. For Decrees finalized after December 31, 2018, spousal support will no longer be taxable to the recipient nor deductible to the payer.
  • How to file for the previous year – Taxpayers file according to their marital status as of December 31st  of the tax year. If your divorce is final before that date, you can no longer file a “married filing jointly” return, so you will most likely file as single or head of household. If your divorce is not final by the end of the year, you have the option to filing jointly or “married filing separately” for that year. Make the decision about how to file taxes only after receiving advice from a tax professional. If you file separately, you will need to decide how to allocate itemized deductions.
  • Who claims the kids – If you have children, the divorce decree should specify which parent claims which child in which tax year. State guidelines may differ from the IRS guidelines, so you can’t assume that the person who has the children “most of the time” will claim them dependents. Beginning January 1, 2018, there will no longer be personal exemptions for children. However, it will be important to decide which parent will claim them for purposes of filing as Head of Household.
  • Mortgage interest and property tax deduction – Whoever ends up with the house will likely assume all property taxes and deductions. However, if you sold the home after the divorce, whoever was in the home should look at assuming all responsibilities or deductions. If both resided in the home until the divorce was final, then the deductions could be split – although this may not be advantageous. While there is no formula, it’s best to work it out ahead of time to make sure things are fair and agreeable to both parties. If the house is to be sold pursuant to the divorce, be aware of the exclusion limits of capital gains from taxability.
  • Transfers of marital property – There are many things that you may transfer or divide during a divorce, and each brings has its own guidelines. The more complex the marital estate, the more you’ll want to have an expert to guide you through. Some assets may be subject to taxes, such as IRAs, 401Ks, Stocks, Brokerage Funds, etc., if not dealt with correctly.  A divorce decree may allow you to transfer penalty-free. However, if you have to withdraw from these types of accounts, you may be subject to penalty or tax consequences.

The key to addressing and getting through tax concerns during divorce is to bring all the information to the table and be transparent throughout the process.

Financial Neutral Professionals

The right professionals will be able to answer many of your questions. The financial neutral professionals at Best Legal Choices will take a unique approach to helping you through the divorce. We will answer your financial questions or refer you to the right professionals if you need specialized support. Contact us today to learn more.