Every divorce is different, but there is no doubt that it will change the way you approach and file your taxes.
That’s why seeking divorce advice from professionals before any official proceedings is a prudent move. There are many significant tax implications to consider, such as:
- Filing status
- Child support
- Property division and the resulting tax implications
- Custody arrangements and parenting plans
You are considered legally divorced as of the last day of the calendar year. You must file as single or head of household. You may also claim one of these statuses if you are not divorced but you do have a legally-binding separation agreement, or if you and your spouse have lived apart for (at least) the last 6 months of the tax year. If you were still married on December 31 and were still living together you must file married filing jointly, or married filing separately.
When parting spouses don't trust each other, it is recommended that they file separately.
Other things to think about are dependent exemptions and custody, including:
- When claiming dependent exemptions after a divorce, the IRS will generally assume that the parent with primary custody will claim the exemption for the dependent children;
- A divorced couple with two or more children may decide to divide the exemptions between them, with the higher income parent getting the larger tax break;
- Tax breaks can sometimes phase out as income grows higher; and
- Child support payments are not deductible to the parent paying them, nor are they taxable to the parent receiving them.
Property Division and Alimony
- Property can be moved between spouses with no taxable event. The spouse receiving the asset also gets the tax basis. There is no taxable event until the party sells the asset.
- Qualified retirement plans can be moved to the other spouse by QDRO ("qualified domestic relation order"). Non-qualified retirement plans (IRA) do not need a QDRO. They can be moved after the final decree is signed.
- Alimony payments are tax deductible, while alimony received is taxable.
Are you contemplating divorce? Make an appointment to speak to a Certified Divorce Financial Analyst to determine the most prudent course of action.
Robert D. Bordett CFP, CDFA Collaborative Practice and Mediation Services
888 U2AGREE (888.822.4733)