Taxes and Divorce: The Top 5 Tax Law Questions Answered

To make an already difficult time more difficult, divorcing couples have to deal with how to file taxes during and after their divorce, claiming children as dependents, dividing retirement assets, claiming property taxes and other deductions and figuring out whether support will be taxable. Here, are few of the top five tax law questions clients frequently ask when navigating divorce:

1. Are alimony payments taxable/deductible?

Alimony, also known as spousal support, is a common component of divorce settlements where one spouse provides financial support to the other. Historically, alimony payments were tax-deductible for the paying spouse and taxable income for the recipient. However, recent tax reforms have changed this landscape. As of 2019, alimony payments are no longer tax-deductible for the payer, nor are they considered taxable income for the recipient, provided the divorce decree or separation agreement was executed after December 31, 2018. Understanding these changes is crucial for both parties when negotiating alimony terms.

2. How are child support payments treated for tax purposes?

Unlike alimony, child support payments are neither deductible for the payer nor considered taxable income for the recipient. Child support is intended to cover the basic needs of the child, including food, shelter, and clothing, and thus, it is not subject to taxation. It’s essential to ensure that the terms of child support are clearly outlined in the divorce agreement to avoid any confusion or disputes regarding tax treatment.

3. What are the tax implications of dividing assets in a divorce?

Generally there are no tax consequences for transferring assets between spouses incident to divorce. However, there are exceptions and specific rules that need to be assessed with respect to different types of assets. For example the transfer of retirement accounts, such as 401(k) or IRA accounts, may incur tax consequences if not handled correctly. A QDRO (Qualified Domestic Relations Order) is required when a spouse transfers part of their qualified retirement/pension plan as a part of the divorce agreement.

4. Can the court force you to file taxes jointly?

In some cases, especially if the divorce proceedings span multiple tax years, the court may require spouses to file taxes jointly for the year in which they were still legally married. This is commonly referred to as the “rule of the year,” meaning that the parties can file jointly so long as they are married as of December 31st of a given year.  Filing jointly can have significant tax implications, as both spouses become jointly and severally liable for any taxes owed, including any inaccuracies or omissions on the return. Understanding the implications of joint filing and seeking guidance from tax professionals is essential in such situations.

5. How are taxes affected by the sale or equitable distribution of the marital home?

The marital home is often one of the most significant assets subject to division in a divorce. The transfer of the home between spouses in a divorce is not a taxable event, but carryover tax basis applies to the transferred property. Similarly, the sale of real estate or investment properties may result in capital gains taxes. Understanding the tax basis of each asset and the potential tax implications of transferring or selling them is crucial for devising a fair and tax-efficient settlement.

Navigating the intersection of tax law and divorce proceedings can be daunting, but with the right guidance and expertise, it’s possible to achieve a favorable outcome. If you’re facing divorce and have questions about the tax implications, it’s important to make sure that your specific issues are reviewed by the right legal counsel and tax experts. For more help with your divorce questions, contact our office to schedule a consultation with Georgia Fraser, Esq. of Fraser Family Law Office LLC. 609-223-2099.