Tax implications may not seem like the most important issue for someone going through a divorce but they can have serious financial consequences. Certain provisions within a divorce agreement could make a substantial difference in the amount of your tax refund or liability. Below are a few tax “rules” to keep in mind:
- Timing of Divorce. The IRS considers someone married for federal income tax purposes if the person is legally married pursuant to Iowa law on the last day of the taxable year, or December 31. The same holds true if a party initiates a divorce case prior to December 31 but the case is not finalized until the following tax year. Conversely, the IRS will treat a party as unmarried if the divorce case is completed prior to December 31 of a taxable year.
- Joint and Several Liability. You become jointly and severally liable for all taxes due when filing a joint return with your spouse. For example, if you earned $40,000 and your spouse earned $100,000 but failed to pay taxes on that amount, the IRS can collect the taxes due from you. It is best to consult with your attorney to ensure you are following each and every order put in place.
- Dependency Exemptions. According to the IRS, only one parent can claim a dependent child on their tax return in any given year. Typically, you and the other spouse can agree on which parent claims the child(ren) in a specific year. If there is no agreement in place regarding dependency exemptions, the right to claim a child belongs to the parent with whom the child lived most during the year.
- Head of Household. If you are separated from your spouse, you might qualify as head of household even if your divorce is not final by December 31. This means that (1) you and your spouse have not lived together for the last half of the tax year; (2) you paid more than half of the cost of maintaining your home for the last year; (3) you can claim a dependent; and (4) you file a separate tax return from your spouse.
- Alimony. The Tax Cuts & Jobs Act of 2017 changed the tax treatment of alimony for any divorce decree entered on or after January 1, 2019. Specifically, any recipient of alimony is not required to treat alimony as taxable income. On the other hand, the payor of alimony no longer receives the benefit of deducting alimony payments from income for tax purposes.
- Transferring Property. Generally, property transfers made during the divorce are treated as non-taxable events for federal and gift tax purposes. Typically, the martial residence or business is the largest marital asset subject to division. When selling a personal residence that was used as a principal residence for two of the last five years, up to $250,000 (filing single) or up to $500,000 (filing jointly) may be excluded from capital gains tax.
If you are considering a divorce, it’s essential that you consult with a family law attorney to consider how the foregoing issues could impact your taxes. For more information, please contact Simpson Legal Group, LLC, at (712) 256-9899 or go to our website at www.simpsonlegalgroup.com.