There are various tax considerations that divorcing couples need to address as proactively as possible in order to avoid unexpected liabilities and optimize their financial outcomes. If you’re divorcing from your spouse, it’s likely that taxes aren’t at the top of your list of issues that you should be concerned about. However, if you don’t approach this subject in an informed way, your financial stability and security could be affected for years to come.
Most immediately, you need to clarify your filing status, perhaps for last year and this year, just this year, or this year and next year, depending on the timing of your split. Your marital status on any given December 31 will inform your filing status for the entire tax year. If you are divorced by the end of the year, you must file as single or head of household if you qualify. If you remain legally married, you can file jointly or separately. Filing jointly often provides tax benefits, but if your divorce is contentious, filing separately may be a safer option to avoid potential liability for your spouse’s tax errors or fraud.
Longer-term considerations
The tax treatment of alimony and child support has recently changed due to the Tax Cuts and Jobs Act of 2017. For newly divorcing couples, alimony payments are not tax-deductible for a payer, and recipients do not have to include them as taxable income in their reporting. Child support payments, however, are not deductible by a payer and they are not considered taxable income for a recipient.
Transfers of property between spouses per the terms of their divorce settlement are generally tax-free. However, the tax basis of that property carries over to the receiving spouse, which can affect future capital gains taxes. For example, if you receive the family home in your divorce settlement and later sell it, you may be held liable for capital gains taxes on any appreciation that has evolved since the original purchase.
From retirement accounts to who claims their children as dependents on tax forms, there are ultimately a host of additional tax considerations that divorcing couples need to take into account. As your situation is unique, seeking personalized legal guidance can help you to make wise decisions about your unique circumstances.