Divorce is not only an emotional upheaval but can also significantly affect your finances, especially your tax filings. If you’re in the middle of a divorce or considering it, understanding the tax consequences is crucial.
1. Asset Division: Most assets, like cash and business ownership, can be split tax-free between couples. The recipient retains the asset’s existing tax basis and holding period.
2. Alimony & Support Payments (Post-2018): Alimony payments are not deductible for the paying spouse. Moreover, the recipient doesn’t include these payments as income. Note: Child support isn’t tax-deductible.
3. Selling a Home: Couples selling their primary residence due to divorce might avoid taxes on up to $500,000 of profit, given they’ve lived there for 2 out of the past 5 years.
4. Retirement Funds & Pensions: These are often marital assets. When splitting, consider vesting schedules which might affect account value during separation.
5. Qualified Domestic Relations Order (QDRO): This order allows one spouse to receive a share of the other’s pension benefits. The recipient is taxed on these benefits.
6. Filing Taxes After Divorce: Your tax filing status will depend on your marital status on December 31. Options include Single, Married Filing Separately, or Head of Household.
7. Legal Fee Deductions: Usually, you can’t deduct divorce-related legal fees. Exceptions might be for tax advice, alimony, or property settlements.
8. Joint Tax Return Liabilities: If your spouse has tax debts or unfiled returns, you could be held responsible. While a divorce decree assigns responsibility, it doesn’t free you from creditors or the IRS.
9. Relief Options for Joint Tax Liabilities: Options include Innocent Spouse Relief, Separation of Liability Relief, and Equitable Relief. Eligibility varies, but factors can include marital status, financial hardship, or experiencing abuse.
Stay Updated: Like many life events, divorce has significant tax implications. Keep yourself informed on the latest tax regulations.
Seek Professional Help: If you’re unsure about the tax implications of your divorce, consult with a tax professional. They can offer guidance tailored to your situation.
*Note: Always consult with a tax professional to understand your unique situation.*
Divorce is a highly personal event that can significantly impact all aspects of your life, including your financial situation and tax filing. Taxes after a divorce can become complex due to the potential for negative tax consequences. Many people overlook the tax implications during their divorce proceedings. If you are a business owner, these tax issues can further complicate the situation as your business ownership is a significant personal asset that becomes part of the marital property.
Most assets, such as cash and business ownership interests, can be divided between you and your soon-to-be ex-spouse without triggering federal income or gift tax consequences. Under this tax-free transfer rule, the spouse receiving the asset inherits its existing tax basis (for tax gain or loss calculations) and its existing holding period (for short-term or long-term holding period considerations). For instance, if you give your house to your spouse in return for retaining 100% of your business stock, this exchange is tax-free (Sam Brown, CPA)., including your financial situation and tax filing. Taxes after a divorce can become complex due to the potential for negative tax consequences. Many people overlook the tax implications during their divorce proceedings. If you are a business owner, these tax issues can further complicate the situation as your business ownership is a significant personal asset that becomes part of the marital property.
For divorce decrees issued after 2018 that include alimony or support payments, there are no deductions for the spouse making these payments. Furthermore, the recipient spouse doesn’t need to include these payments in their gross income. Child support payments are not tax-deductible by the paying spouse.
If a married couple decides to sell their home due to a legal separation or divorce, they may be able to avoid taxes on up to $500,000 of their profit gained. This is provided they own the property and were using it as their main residence for at least 2 of the previous 5 years.
Retirement funds accrued during the marriage are usually considered marital property and must be divided equally. Pension benefits of a spouse are often part of a divorce settlement. When dividing retirement funds, it’s crucial to consider any vesting schedules associated with employer-sponsored pension or retirement accounts, as these can affect the account’s value at the time of separation.
Obtaining a “Qualified Domestic Relations Order” (QDRO) is a recommended practice during a divorce. This order grants one spouse a share in the other’s pension benefits and taxes the receiving spouse on these benefits. Without a QDRO, the spouse who earned the benefits will be taxed, even if the benefits are paid to the other spouse (Sam Brown, CPA).
After divorce, you’ll file your taxes separately. The date the divorce is finalized will decide how you file for tax. Your filing status depends on your marital status at 11:59 pm on the last day of the year. You’ll file as:
You may need to modify your income tax withholdings on a W-4 to reflect your new filing status and financial situation. Generally, you can’t deduct legal fees associated with your divorce, but there could be exceptions for costs related to tax advice, alimony, child support negotiations, or property settlements.
If your spouse owes back taxes or has unfiled returns, you could be held responsible for that tax debt. It’s advisable to ensure all returns have been filed and all tax liabilities paid. A divorce decree doesn’t absolve you from creditors—it only assigns responsibility. If you were liable for any tax debt before the divorce, you’ll still be liable after the divorce. Although a court can make your ex-spouse responsible—a decision enforceable through the courts—the IRS can still come after you.
While married, if you file a joint tax return, both parties are jointly and severally liable for tax, penalties, and interest. Divorce doesn’t eliminate this responsibility to the IRS and your state. However, there are some types of relief available for this responsibility with the IRS, which you should explore before returning to family court.
To be eligible for Innocent Spouse Relief, you need to fulfill these criteria:
For Separation of Liability Relief, you must fit one of these categories:
If you don’t qualify for either Innocent Spouse Relief or Separation of Liability Relief, you can apply for Equitable Relief (IRS). You may be eligible for this if something wasn’t correctly reported on your joint return and it’s your spouse’s fault. You can also apply if the tax reported was accurate, but the payment wasn’t made when the return was submitted. For Equitable Relief, you need to request it within the IRS’s collection period. If you’re requesting a tax refund, it must be within the refund statute period, typically three years from the date the tax return was filed.
Factors that may qualify you for relief include but are not limited to:
If you still don’t qualify, consider returning to family court, setting up an installment agreement, presenting an offer-in-compromise, asking for abatement of penalties and interest or filing for bankruptcy.
Avoiding surprises is crucial. Like many significant life events, divorce can have substantial tax implications. Staying informed about the latest tax regulations and planning ahead can help minimize any negative tax consequences related to your divorce. If you have any questions about the tax implications of divorce, don’t hesitate to reach out to us and schedule a meeting.
Sam Brown CPA: https://www.sbcpaohio.com/
IRS: https://www.irs.gov
Bryson Law Firm: https://www.brysonlawfirm.com/
