Getting Free Isn't Always Free, Tax Considerations of Divorce

Tax Considerations relating to Separation and Divorce

When married couples go through a legal separation or divorce the change in their relationship status affects their tax status. The IRS considers a couple married for filing purposes until they obtain a final decree of divorce or separate maintenance.

Update withholding

Be sure should you become embroiled in a divorce or separate, you will need to file a new Form W-4 with your employer to adjust to the proper withholding based upon your new filing status.

Should you receive alimony, and it is a pre-2018 divorce agreement, or you have agreed that the payments will be taxable you most likely will need to make estimated tax payments.

Tax treatment of alimony and separate maintenance

Amounts paid to a spouse or a former spouse under a divorce decree dated prior to December 31, 2018, or due to a separate maintenance decree, or a written separation agreement may be taxable. Certain alimony or separate maintenance payments are deductible by the payer spouse, and the recipient spouse must include it in income.

Alimony generally is not taxable for divorce agreements put into effect after 2018 according to Internal Revenue Code Section 11051 of the Tax Cuts and Jobs Act (TCJA).

Couples entering into alimony or separate maintenance agreements made under a divorce or separation agreement executed after 2018 or executed before 2019 but later modified if the modification expressly stating the repeal of the deduction for alimony payments applies to the modification will not be able to deduct the payments or need to include those payments as income. Alimony and separate maintenance payments received under such an agreement are not included in the income the recipient spouse.

Determine who will claim a dependent child
if filing separate returns

Generally, the parent with custody of a child can claim that child on their tax return. If parents split custody fifty-fifty and are not filing a joint return will have to decide which parent gets to claim the child.

There are tie-breaker rules if the parents cannot agree. Child support payments are not deductible by the payer and are not taxable to the payee.

Report property transfers, if needed

Generally, there is no recognized gain or loss on the transfer of property between spouses, or between former spouses if the transfer is due to a divorce. In some instances, people may have to report the transaction on a gift tax return.

Consider filing status

Divorcing couples who are still married as of the end of the year are treated as married for the year and must determine their filing status.

Here the statuses separating or recently divorced people should consider:

• Married filing jointly. On a joint return, married people report their combined income and deduct their combined allowable expenses. For many couples, filing jointly generally results in a lower tax than filing separately.

• Married filing separately. If spouses file separate tax returns, they each report only their own income, deductions, and credits on their individual return. Each spouse is responsible only for the tax due on their own return. People should consider whether filing separately or jointly is better for them.

• Head of household. Some separated people may be eligible to file as head of household if all of these apply.

o Their spouse did not live in their home for the last six months of the year.

o They paid more than half the cost of keeping up their home for the year.

o Their home was the main home of their dependent child for more than half the year.

• Single. Once the final decree of divorce or separate maintenance is issued, a taxpayer will file as single starting for the year it was issued, unless they are eligible to file as head of household or they remarry by the end of the year.