Significant Tax Implications of Divorce - Part 1

Divorce can have significant tax implications, and it’s essential to be aware of how it may affect your finances. Here is part 1 of some income tax tips for people going through a divorce:

Change in Filing Status - After a divorce, you may need to update your filing status. If you’re divorced by the end of the year, you cannot file as "Married Filing Jointly." You may file as "Single" or "Head of Household" (if you qualify). To file as Head of Household, you must have a dependent (usually a child) and provide more than half of the financial support for that child. Filing as Head of Household usually results in a higher standard deduction and a lower tax rate than filing as Single, which can help reduce your tax bill.

Child Custody and Dependents - If you have children, one of you can claim them as dependents for tax purposes. Typically, the custodial parent (the one with whom the child spends the most nights) claims the child, but this can be altered through the divorce settlement. If the non-custodial parent is to claim the child, a signed IRS Form 8332 may be required to show that the custodial parent agrees. Additionally, the parent who claims the child may be eligible for the Child Tax Credit, which can provide significant savings. The credit is subject to income limitations.

Maintenance (Spousal Support) - For divorces finalized before 2019, maintenance is taxable to the recipient and deductible by the payer. For divorces finalized after December 31, 2018, maintenance is not taxable to the recipient nor deductible by the payer.

Transfers of property between spouses in a divorce are typically not taxable, and you don’t have to recognize income on them. However, taxes may come into play if assets are sold in the future. Be sure to get professional advice on the tax implications of your asset division.

Divorce and taxes can be complicated, and everyone’s situation is unique. It’s wise to consult a tax professional or financial advisor who can help you navigate the tax implications specific to your circumstances. By understanding these tax considerations, you can make more informed decisions during and after your divorce, potentially reducing your tax burden and securing better financial outcomes.