When couples get divorced, they can be respectful and cooperate with each other, but that does not mean the IRS will make it easy for them.
Dividing property, and receiving alimony and other assets along with child support, can be complicated.
Division of Assets and Liabilities
- The marital residence: Most of the time a quitclaim deed is not an obstacle to transferring the title from one spouse to the other spouse; who is on the mortgage is more important. If the mortgage is held jointly, and one spouse is going to take on the residence, they will need to get the mortgage in their name and get the other spouse’s name off of the mortgage. That means that the party taking over the residence will need to be able to qualify for the mortgage and get approved for a refinance of the mortgage. Issues to think about with the mortgage include whether they are just looking to refinance the outstanding balance of the mortgage or to take out cash and increase the mortgage balance.
- Investment accounts: Investment accounts will need to be divided. That means considering not only the current value of the investment but also the cost basis. Without knowing the cost basis, one spouse may be taking on a tax bill they are not aware of.
- Retirement accounts: Unfortunately, you and your spouse cannot just move money from an IRA or 401(k) because you privately agree to it. There is a legal procedure required to transfer the money, but it comes with the benefit of not being a taxable event at the time of transfer.
Who claims the kids?
Under current IRS regulations, you can no longer use a divorce settlement agreement to backup your claim of dependency. You now have to use IRS Form 8332, which is titled “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.” It will need to be signed by the custodial parent so that the non-custodial parent may attach it to the tax return. This can be done each tax year or it may be signed for a permanent change. There are significant tax implications, so you need to know what you are doing before it is done—or contact a financial professional.
What is your filing status?
Many couples don’t realize that their marital status is determined by their marital status at the end of the year. That will determine how you file your tax return; even if you and your spouse divorce at 11:59 pm on December 31, you’re still considered single or head of the household for the whole year.
Alimony and child support
Keep in mind that alimony is taxable to the spouse receiving it and tax deductible to the spouse paying it.
Alimony may present a shock to the person receiving it in the sense that he or she could possibly be in a higher tax bracket as a result of a receiving alimony or a filing status change.
Child support, by contrast, is not taxable to the recipient, and it’s not deductible for the person paying it.
As a best practice, I recommend that all taxpayers seek the advice of a financial professional—especially if they got divorced within the tax year. Certified Divorce Financial Analysts have the training and experience to walk you through the process so that you and your ex-spouse can lay a solid foundation for your post-divorce lives. To find out more, contact me here.
Robert D. Bordett CFP, CDFA
Collaborative Practice and Mediation Services
888 U2AGREE (888.822.4733)