Taxes. Most of us don’t love thinking about them, and most of us would certainly agree that in many respects, tax time is a headache. This is true almost every year, but in some years, it is more true than others. If you are in the midst of or have recently finalized a divorce, new tax issues can arise about which you may have previously been unaware, and understandably, you may have many questions about your tax obligations.
Certainly, it is always wise to seek the advice of a qualified tax professional for questions pertaining to your particular circumstances, but generally speaking there are some helpful things to know about taxes after going through a divorce, and common tax questions that many who are going through a divorce or are contemplating a divorce ask frequently. Those questions include:
- Am I considered married or single for filing status purposes? According to the IRS rules, if your divorce has not been finalized as of December 31st, you are still considered married, even if you or your spouse filed for divorce during the year. It doesn’t matter whether you have been living separately, unless you have a court order officially determining your separate status. On the other side of the coin, however, if the court issued your divorce decree on December 31st, you are considered unmarried for that entire year, and you must either file your taxes as a single person, or as head of household if you qualify.
- If my spouse and I are still legally considered married, should we file a joint married return? Even if you no longer live together, you have the option of filing a joint married return with your spouse if you are still technically married. This may be beneficial insofar as it makes you eligible for a higher standard deduction when you combine your incomes. On the flip side of that coin, however, filing jointly also means that you become jointly and severally liable for all taxable income, even income that your spouse personally earned. Thus, if your spouse fails to pay taxes (even if your spouse earned $90,000 and you earned $30,000), the IRS could attempt to collect those taxes from you. The same is true if your spouse fraudulently claims a credit or deduction – you would be jointly responsible for any resulting liability.
- Can I file as “head of household”? This is an excellent question, and the answer can be important for those who qualify. If the IRS considers you to still be married for tax purposes, you do not necessarily have to file as “joint married” or “separate but married,” nor do you necessarily have to file as “single” if you’re technically divorced. You may, in the alternative, qualify to file as “head of household”. To qualify as a head of household under the IRS rules:
- You and your spouse must have stopped living together no later than May 31st of the tax year;
- You must have paid at least 51% of the cost of maintaining your home for that year;
- You must have a dependent who has lived with you for more than half of the year (although there are some exceptions to this rule – for example, your parents may qualify as dependents if you pay for more than half of their living expenses even if they do not live with you);
- You must have the right to claim your dependent on your tax return even if you do not actually do so (for example if you have transferred that right to the other parent as part of the terms of your divorce).
If you meet the foregoing qualifications, you may be able to file as head of household. If you choose to do so, you must file a separate tax return from your spouse. Filing a joint married return means that neither you nor your spouse qualify as head of household.
- Are the fees I pay to my divorce attorney tax deductible? Typically, fees that you pay to your divorce attorney will not generally be considered tax deductible. Fees paid to an attorney in the course of production or collection of gross income might be, however. These matters can become fairly complex and can vary depending upon your particular circumstances, so it is always wise to consult with your attorney and a financial advisor if necessary. A qualified and experienced attorney will help you to be sure you receive credit for any tax-deductible amounts you have paid.
- What about alimony? Alimony is money that a supporting spouse (generally the higher-earning spouse) pays to a depending spouse (generally the lower-earning spouse). Prior to the passing of the Tax Cuts and Jobs Act, alimony payments were able to be reported as an above-the-line deduction, which was deductible by the spouse paying the alimony, and required to be reported by the recipient, although this is now no longer the case.
- Is child support deductible? Child support is money paid by one spouse to the other specifically for the benefit of any child(ren) the couple have together. It is not deductible by the payor spouse, nor is it reportable as income by the spouse who receives it. It should also be noted that both the IRS and state governments have the authority to garnish the tax returns of individuals who fail to meet their child support obligations.
- Which parent gets to claim the children as dependents? According to the IRS rules, only one parents can claim a child on their tax return in any particular year. If you have two children, you can claim one child on your tax return while your ex-spouse claims the other – this is in fact fairly common after separation and divorce. As parents, you have the option of coming to an agreement as to who will claim the exemption. If you cannot come to such an agreement, you may choose to:
- Alternate years for claiming the exemption;
- If there is more than one child, allow each parent to claim one (or more) of the children;
- Follow the IRS guidelines on who may claim the children as dependents:
- Typically, the parent eligible to claim the children by default is the custodial parent, which is defined by the IRS as the parent who has custody for the greater portion of the calendar year, but:
- If the parents have identical custodial time, the parent with the higher income is typically permitted to claim the deduction.
- What are the important tax consequences with respect to our marital home? Your home may be your most valuable asset that subject to division in the divorce, so understandably, you will want to carefully consider any tax consequences prior to deciding the best course of action to take with respect to whether to keep or sell the home. While there are several paths you can take with respect to the marital home, some trigger tax consequences and others are tax-free. For example, if one spouse plans to remain in the home, that spouse can agree to “buy out” the other spouse’s interest in the home, or that spouse may take the equivalent of his or her share of the home in the form of other property. Typically, those choices would not trigger any significant tax consequences. On the other hand, if the spouses choose to sell the home and split the proceeds, any profits above $250,000 will be taxed as a capital gain. Of course, if the spouses choose not to sell the home, no tax consequences will be generated.
- What about my investments and retirement accounts? There are a number of different types of retirement accounts, and each has its own unique tax benefits and consequences. It is important to remember that most types of retirement, pension, and investment accounts, if acquired and contributed to during the course of the marriage, are considered marital property, and will be subject to equitable division upon divorce. For certain employer-sponsored retirement plans, like a 401(k) and pension plan, you will need to obtain a Qualified Domestic Relations Order (QDRO). This is a legal document, signed by a judge, which allows you to assign rights to money from a retirement account to another person, and it will direct the administrator of the account to send money from the retirement account to your spouse.
For an IRA, on the other hand, there is no need for a QDRO if you have a court-approved divorce decree or separation agreement. That transfer of property will be classified as a rollover or transfer and is non-taxable if the funds are deposited into another retirement account.
Certainly, there are a wide variety of pension and retirement accounts, and consulting with an attorney or financial advisor as to the best steps to take and the tax effects of any decisions you make with respect to your particular circumstances is always wise.
In addition to questions about retirement and pension accounts, those getting divorced may also have questions about stocks or other investment assets. The tax rules can be quite complex and varied depending upon the asset in question, so consulting with a financial professional and an attorney about your particular situation is always advised.
Call the Law Office of Dustin McCrary Today
Without question, divorce can be complex in many ways – there are countless decisions to make, and worrying about the tax consequences of each of those decisions can understandably become overwhelming. Consulting with a financial advisor and an attorney who understands the law and the tax potential decisions you are considering can be incredibly helpful in relieving anxiety and stress over those choices. At The Law Office of Dustin S. McCrary, we would be glad to help you with these issues, and any other divorce matters for which you need the highest quality professional knowledge and experience. Call us today. We look forward to helping you soon.