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Tax Considerations During and After a Divorce

People often ask about the tax considerations during and after a divorce that they should keep in mind. Below are some key points to consider.

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Filing Status for Unfiled Tax Returns

First, you’ll need to determine whether you’ll file a single or joint tax return for any unfiled tax years. If you are still legally married on December 31st of a given year, you may file a joint tax return for that year — even if the divorce is finalized early the following year.

For example, if you get divorced in January but were still married on December 31st of the prior year, you can file a joint return for that year. Filing jointly often reduces overall taxes compared to filing separately. Many couples include language in their divorce agreement requiring cooperation in filing a joint return for the prior year and dividing any refund or tax owed.

If the divorce is finalized before December 31st, you cannot file jointly for that year. You’ll need to file as single or, if you have dependents, possibly as head of household.

Post-Divorce Filing Status and Tax Brackets

After your divorce, you will no longer be able to file jointly. This may move you into a higher or lower tax bracket depending on your income and your ex-spouse’s income. When negotiating alimony and child support, it’s important to consider each party’s gross and net income after taxes, based on the new tax brackets.

Claiming Children as Dependents

You and your former spouse must decide who will claim the children as dependents. Generally, parents alternate years or split dependents if there is more than one child. For instance, each parent might claim one child each year, or you may alternate years if there is only one child.

Real Estate and Related Deductions

If you and your spouse own real estate, make sure to address who receives any tax deductions related to that property — such as mortgage interest or real estate taxes.

• If you sell the home and split the proceeds, the deductions are usually shared equally.
• If one spouse keeps the home, that spouse is typically entitled to all the associated deductions.
  

Alimony and Child Support Taxes

Alimony and child support are both paid in after-tax dollars.

• For divorces finalized prior to 2019, alimony was deductible for the payor and taxable to the recipient.
• Under current law, alimony is not tax-deductible for the payor and not taxable income for the recipient.
  

Child support has always been paid in after-tax dollars.

Dividing Assets and Tax Implications

Not all assets with the same dollar value are equal after taxes. For example:

• $100,000 in cash is not the same as $100,000 in a 401(k), since funds withdrawn from a 401(k) are taxable as ordinary income.
• Retirement accounts such as 401(k)s, IRAs, and pensions are generally pre-tax accounts. The recipient will pay taxes when funds are withdrawn, unless it’s a Roth IRA or Roth 401(k), which allows for tax-free distributions.
• Brokerage accounts may trigger capital gains taxes when investments are sold. Although capital gains rates are generally lower than income tax rates, they still reduce the net value of the asset.
  

Capital Gains on Real Estate

If you retain real property and later sell it at a profit, you may owe capital gains taxes. It’s best to consult with your attorney or tax professional to understand any potential tax liability before finalizing your property settlement.

These are some of the basic tax considerations to keep in mind during and after a divorce. Every situation is unique, so it’s important to discuss your specific circumstances with both your divorce attorney and a qualified tax professional.

If you have questions or need representation in a divorce or family law matter, we invite you to contact our office for guidance.