How Will My Divorce Affect My Taxes?
Divorce is a stressful and emotionally draining process, and it is even further complicated by the tax implications of dissolving the marriage. If you are facing a divorce, it can impact your tax situation in a number of ways. Here are some the most important things you need to know about taxes and divorce:
Your Tax Filing Status Will Depend on the Timing of the Divorce
Your filing options for the tax season following your divorce will depend on when the divorce process is finalized. If the final divorce decree is issued before December 31st of the tax year in which you are filing, you are considered by the IRS to be “unmarried” for the entire year. This means you would not qualify to choose “married filing jointly” or “married filing separately.” Instead, you would file either “single” or “head of household”, depending on your specific circumstances and which status you are eligible for.
In general, the more desirable filing option for someone who is considered unmarried is “head of household”. Using this status, you receive a larger standard deduction, potential eligibility for various tax credits, and in many cases, lower tax rates. To qualify for “head of household” status, you must have at least one dependent living with you for at least half of the year, and you must have also paid at least half of the upkeep on your home.
If your divorce finalizes after the first of the year, you are still considered to be married for the tax year in question, allowing you to choose “married filing jointly” or “married filing separately.” The “married filing jointly” status usually gives you a better tax situation, although this is not always the case. Aside from the financial implications of either filing status, there are some other reasons you may want to consider “married filing separately.” For example, if you do not trust your spouse and/or you are not on good terms, you may decide that it is far less stressful just to separate your finances, even if it will cost you a few dollars more. As always, consult with your CPA or tax professional to determine the best option given your circumstances.
The Parent with Majority Parenting Time usually Claims the Children
When it comes to who it is allowed to claim your child/children as dependents, this right generally goes to the parent who has primary physical custody, also known in Florida as “majority parenting time”. The custodial parent may release their dependent exemption claim to the other parent by signing a written declaration on their tax return. However, under the Tax Cut and Jobs Act of 2017, personal exemptions were removed from the tax code until this provision sunsets in 2025. So, for now, there is very little reason to consider releasing the dependent exemption to the noncustodial parent. Being able to claim the dependent is far more important for the custodial parent, because it makes them eligible to file under the “head of household” status, and since the custodial parent is often in a lower income bracket, it can also make them eligible for Child Tax Credits, Child and Dependent Care credits, and a higher Earned Income Tax Credit.
The Division and Dissolution of Assets may have Tax Consequences
Dividing the marital estate usually does not have any direct tax implications. However, if you have significant assets and/or a more complex financial structure, certain actions could create adverse tax consequences. For example, if you are liquidating various assets such as stocks, real estate, or a family-owned business, you may have to pay capital gains taxes on the profits of the sale.
Dividing retirement accounts is another area in which you need to take extra care to ensure that there are no tax penalties. For many of these accounts, you will need to create a Qualified Domestic Relations Order (QDRO) in order to withdraw retirement funds for the purpose of distributing them to the other spouse. QDROs are complicated documents that must be drafted carefully and precisely in order to ensure that they fully comply with the legal requirements.
Child Support and Alimony are Tax-Neutral
The payment and receipt of child support and alimony have no effect on the tax status of either the payor or recipient. Alimony used to be tax-deductible for the payor spouse and taxable income for the recipient spouse, but the Tax Cut and Jobs Act of 2017 eliminated that provision for all divorces finalized after December 31, 2018 and going forward.
Contact an Experienced Divorce Attorney Today
If you are considering a divorce in the near future, be sure to work with an attorney who has extensive family law experience as well as an in-depth understanding of important issues such as taxes and divorce and how they will impact your specific circumstances. If you are in Pensacola, Florida or any of the nearby communities, attorney Crystal Collins Spencer is here to help. Call our office today at 850-912-8080 to schedule a personalized consultation. You may also message us through our online contact form or stop by our office in person at your convenience.