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There’s no doubt about it: divorce can be taxing. But if you’re getting divorced, taxes may be the last thing on your mind.
Breaking up with your spouse is never easy. While there are many things to consider, and the process of ending a marriage can be emotional, it is crucial that you also understand the tax implications of your decision.
When you file for divorce, your tax situation changes.
Depending on your circumstances and the specifics of your divorce agreement, you are likely to have some questions when it comes time to fill out your return.
What will change on your tax return after a divorce? Are there deductions available for child support and alimony? Who claims the children? And are property settlement transfers taxable?
Read on for vital information you’ll need when filing your tax returns after a divorce.
From joint accounts, assets, and debts to responsibility for the children, dividing up the elements of your marriage is complex. Here are some key considerations you’ll need to keep in mind.
The IRS determines your marital status for tax purposes by whether or not your divorce is final on December 31 of the tax year.
If you signed your divorce papers before midnight on that date, the IRS considers you single for tax purposes—even if your marriage was still in place for most of the year.
Similarly, if a court has not yet issued your final divorce decree on December 31, you are still considered married—even if you have not spoken in months.
To put it simply: the IRS still considers you married for tax purposes until a court order states otherwise, and once the court so decrees, they consider you divorced for the entirety of that tax year.
As discussed above, if a court finalizes your divorce decree by the last day of the year, you cannot choose Married Filing Jointly as your filing status.
Likewise, if your divorce is not final at the end of the year, then you must file as Married Filing Jointly, Married Filing Separately, or Head of Household (if qualified).
Navigating the rules for the best tax outcome can be tricky.
For example, if you are legally married but live apart, you can still file a joint return which qualifies you for a higher Standard Deduction. If you both earn the same amount, this will not make a big difference, but if you earn different amounts this can lower your joint tax bill.
But then you are left with the challenge of divvying up the savings, which can create a whole new set of complications for the divorce.
Some divorcing couples can lower their tax bill by filing separately. Suppose one spouse has deductions that are limited by a percentage of income, like medical expenses. In that case, the other spouse may be able to lower their tax liability with a separate filing.
If you are providing a home for a dependent (typically your child, although other relatives can qualify), you may also be able to lower your tax bill by filing as Head of Household.
However, to do so you must meet specific requirements.
For example, you and your spouse must have stopped living together for the last six months of the tax year, you must have paid more than half of the cost of maintaining the home, and you must file a separate return from your spouse.
Do you have more than one child? You can claim one while your spouse claims another. But even in this circumstance, only one parent may file as head of household.
Usually, a child is a “qualifying person” when they live with the custodial parent for most of the year. If the child spent an equal amount of time living with both parents, the spouse with the higher adjusted gross income should claim the child and file as head of household.
If this sounds complex and situation-dependent, that is because it is. There are many factors to consider here, even as you are trying to navigate the emotional challenge of a divorce.
We can help you think this through; just contact us here.
Child support payments are not, and have never been, tax-deductible by the payer.
To the IRS, these payments correspond to the expense you would have incurred feeding and sheltering your children if the family unit had stayed intact. Since those expenses are personal and not deductible, the IRS treats child support payments the same way.
By the same logic, child support is also not taxable to the recipient. These payments are for the benefit of the children, and so it is not considered income. Therefore, it is not taxed, and the parent does not need to report it on a tax return. The tax code considers child support to be a tax-neutral event.
Although alimony payments were tax-deductible in the past, the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated this deduction from January 1, 2019, onward.
The new rule is not retroactive, so alimony remains deductible by the payer if the divorce occurred before that date.
For any divorce or separate maintenance agreement executed after December 31, 2018, alimony and separate maintenance payments are not deductible by the payer and are not included in the recipient’s income.
Some provisions of the TCJA will expire in 2025, but this is not one of them.
Without additional tax code reform, the alimony deduction will not return.
When it comes to the division of marital assets, property is often a significant issue.
The good news is that the IRS treats most property transfers in divorce as gifts and, therefore, tax-free. Nonetheless, there are some exceptions.
For example, if a transfer occurs more than six years after the date of the divorce, it will be taxable unless you can demonstrate that it is “incident to divorce.”
A transfer of property is incident to divorce if it is:
This rule means that if over six years have passed, you’ll have to demonstrate that the transfer is still “related to” the divorce. If it is “incident to divorce,” you will not recognize gain or loss.
Keep in mind that there are also certain situations in which it may be beneficial to forego the tax-free status of your transfer.
For example, waiting until later to transfer the property as a “true sale” can increase the cost basis or original value for tax purposes and provide the recipient spouse with savings for a future sale.
This is a complicated question, and it can depend on the property’s value, how long the person holding it plans to keep it, and any realized gains.
The bottom line?
Going through a divorce is never a pleasant experience. The process is likely to be challenging and stressful. That’s why it is in your best interest to minimize difficulties wherever you can. With accurate information and professional guidance, your divorce doesn’t have to be overly confusing at tax time.
If you are a client and would like to book a consultation, call us at +1 (212) 382-3939 or contact us here to set up a time.
If you aren’t a client, why not? We can take care of your accounting, bookkeeping, tax, and CFO needs so that you don’t have to worry about any of them. Interested? Contact us here to set up a no-obligation consultation.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.
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