How Does Divorce Affect Taxes?
Under current tax laws, if you are paying alimony, you can deduct the amounts paid on your taxes and the receiving spouse pays taxes on that amount as income. Going forward however, this will change since the new tax laws were enacted. Court-ordered alimony payments for any divorce after December 31, 2018 will not be deductible by the payer and the receiver will not be required to pay taxes on that income.
There are other ways your taxes can be affected by divorce however including:
- Filing status – one of the most significant changes is in your filing status. Instead of having the option of filing married filing jointly, or married filing single, you now may only file as single, or head of household. Head of household filing requires being able to claim a dependent which may be possible if you are a custodial parent.
- Claiming dependents – while your personal deduction does not go away, you could lose deductions meant for dependent children. In some cases, these changes will be spelled out in your final divorce decree, in other cases, you may have to work this out with your former spouse. Keep in mind, it is not possible for both of you to claim dependent children in the same year on your taxes.
- Health insurance – depending on how your divorce decree is worded, you may be required to obtain your own health care coverage. While the individual mandate is being rescinded, this does not go into effect until 2019.
- Assets obtained in divorce – if your divorce decree transferred specific assets from jointly held to individually held and you sell those assets, you could be facing capital gains taxes. This typically applies to stocks, bonds, and other similar assets.
- Transfer of marital home – if part of your divorce involves transferring the ownership of a marital home, the sale of such home could incur an additional tax burden. However, it may also be possible for each spouse to claim any capital gains which would reduce the tax burden.
- Transfer of retirement plans – in some instances, the court may order one spouse to transfer part of their retirement assets to the other spouse. When this occurs, it is important to ensure that a Qualified Domestic Relations Order (QDRO) is provided to the transfer agent. Using these orders prevents either spouse from incurring a tax penalty.
Contacting a Tax Professional
While nearly every person who is going through a divorce will contact an attorney, in some cases, it may be beneficial to work with a tax professional as well. This is particularly true when a couple has significant assets and has dependent children. Because every tax situation is unique, it could be helpful to speak with a tax professional before signing your final divorce decree.
Other factors which could have an impact on your taxes include when one, or both parties have an interest in a business, if there are business assets which are transferred to the other spouse as part of a divorce, there could be additional tax implications.
Since 1983, Rue & Associates, Inc. has been providing individual taxpayers and small business owners with tax services in the central Virginia area and nationwide. If you are facing divorce and you are uncertain about the tax implications, contact us today and let us help you understand what tax issues you could be facing after your divorce.