Divorce can impact every aspect of your life, including your tax situation. When negotiating a divorce settlement, it’s essential to carefully consider the tax implications you may face. While some are straightforward, others may not be so obvious. Everything from your filing status to the division of property, a spousal support award, and who gets to claim minor dependents can have a lasting effect on your financial situation as you move forward to the next chapter of your life. Understanding how divorce affects taxes can help ensure you make informed decisions and avoid unexpected tax liabilities in the future.

The following are several areas in which divorce affects taxes:

Tax Filing Status

One of the most obvious ways divorce affects taxes is the change in your tax filing status. When you are legally divorced, you will no longer be able to file your taxes as “married filing jointly” or “married filing separately.” You will either have to file as “single” or “head of household,” if you qualify. Specifically, you can file as “head of household” if you meet each of the following three criteria:

• Your spouse did not live in the home with you for the last six months of the year
• You paid more than half the costs associated with upkeeping the home over the past year
• Your home was the primary home for your dependent child for more than half the year

Your filing status can impact your eligibility for certain deductions, credits, and overall tax treatment. While those who file as a married couple generally have more favorable tax brackets, divorce can result in an increase in your tax liability. Importantly, your tax filing status for any given tax year is determined by your legal marital status on December 31 of the prior year.

Spousal Support

It’s important to understand the tax implications of spousal support if it is awarded after divorce. For divorce agreements dated January 1, 2019 or after, spousal support is no longer deductible for the paying spouse and it is not considered taxable income for the recipient spouse. This is a reversal of the previous tax law. Now, a spouse responsible to pay spousal support would not receive a tax break and the recipient spouse would not be required to report income from alimony on their tax return.

Claiming Dependents

Another way divorce affects taxes concerns which parent gets to claim any minor children as dependents. Only one parent can claim a child for each tax year. The custodial parent, or the parent who has the child for a greater number of nights during the tax year is typically entitled to claim the child. However, the noncustodial parent can claim a child if the parents agree and the custodial parent signs IRS Form 8332: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. In the event the child spends the same number of overnights with each parent and an agreement cannot be reached, the parent with the higher Adjusted Gross Income will be the one who can claim the child.

Property Division

There are no immediate tax consequences for property transfers made pursuant to a divorce settlement. However, the spouse who receives an asset also assumes its carryover basis. This means if it is later sold to a third party, the spouse would be responsible for paying capital gains taxes on the increase in value. There is an exclusion for the primary residence, allowing a couple to exclude up to $500,000 in capital gains if they file jointly, or up to $250,000 if filing separately. Any tax implications of property division must be strategically considered when negotiating a settlement.

Retirement Plans

Tax penalties are not triggered when retirement plans are divided in divorce using a Qualified Domestic Relations Order (QDRO). But if a spouse decides to cash out the account, they will be required to pay income taxes on the amount, along with a 10% early withdrawal penalty if they are under the age of 59 ½. Although QDROs are not used for IRAs, these accounts also have tax-deferred treatment if transferred incident to divorce, ensuring a spouse is only taxed upon any future withdrawals.

Contact an Experienced New York Divorce Attorney

If you are facing divorce, it’s critical to have an experienced divorce attorney by your side who can protect your financial interests and negotiate the best possible settlement on your behalf. At Duke Law Firm, P.C., we offer reliable representation and compassionate counsel to clients in Monroe County, Livingston County, and the surrounding areas for divorce. We welcome you to contact us today to schedule a consultation to learn how we can help.