Some Tax Implications of Divorce (2017)
There are many potential tax implications of divorce in the United States. This article points out a few very general tax considerations to keep in mind. However, all tax/legal situations are unique (and all 50 states have their own laws to follow and these laws do vary considerably from state to state, as well in community property states) and the following list is not intended to provide any specific legal/tax advice. In fact, I am not a family law attorney but instead concentrate on the tax components involved in the divorce process!
- Your marital status for tax purposes is determined as of December 31, 2017. Thus, if your divorce was final in December 2017, you are considered “single” for purposes of your 2017 federal income taxes.
- If you are still legally married as of January 1, 2018, your filing status choices for 2017 taxes would be either “married filing joint” or “married filing separate.”
- If you file as “married filing joint” each spouse is agreeing to pay (potentially) the entire amount of any taxes due. This is called “joint and several liability.” If there is a trust issue involving financial matters and/or payments to the IRS, it would be wise to think strongly before claiming a “married filing separate” filing status.
- You may qualify to claim “head of household” filing status. You meet the criteria for 2017 if the three following requirements are met:
- The person is unmarried as of December 31, 2017.
- He or she paid more than 50% of the cost of keeping up a home during 2017; and
- A “qualifying person” lived in the home for more than 50% of 2017, except for temporary absences, such as school, vacations, etc. However, if the “qualifying person” is instead a dependent parent, he or she does not have to live with that person.
- You can allocate (via negotiations between the spouses) which spouse gets to claim a tax exemption for any children/dependents. To do so, a Form 8332 (or an equivalent substitute) needs to be attached to the Form 1040 tax return for 2017.
- Without any agreement of the spouses, the exemption for any children/dependents generally goes to the parent who spends the majority of time with the children/dependents.
- Either parent can claim any unreimbursed medical expenses that they paid for his/her child even if that parent cannot claim the child as a dependent for tax purposes.
- Child support payments made are not tax deductible.
- Child support payments received are not taxable income.
- Spousal support/maintenance payments (“alimony”) are tax deductible.
- Amounts received as spousal support/maintenance (“alimony”) are taxable income.
- Some legal fees incurred in the divorce proceedings are tax deductible. These include legal fees that relate to tax advice received during the representation.
- Legal fees which relate solely to the divorce proceedings are not tax deductible.
- Property received in a divorce settlement is not a taxable event.
- The cost basis for assets acquired in a divorce (such as real estate, stocks, bonds, collectibles, etc.) is the same as the original cost basis. The fair market value on the date of divorce does not matter for tax reporting purposes.
- Income received from property acquired following the divorce is taxable to the spouse who receives the income. For instance, rental income and income such as interest, dividends, capital gains, etc. all become potential taxable events following the divorce.
- Tax planning should be done before the distribution of assets to determine the tax implications of future income with respect to the assets received.
- There may be taxes owed to whichever spouse receives the marital/primary residence in the divorce proceedings. The capital gain exclusion for a single taxpayer is $250,000, as opposed to $500,000 for a married couple who file jointly. This could produce some unintended tax consequences depending upon who receives the home and its overall value when sold.
- It is possible to transfer some retirement accounts from one spouse to the other spouse in a divorce without any tax consequences, using a QDRO (Qualified Domestic Relations Order). This issue should be thoroughly discussed with competent counsel as issues relating to a QDRO can get very complicated very quickly.
- And finally: federal tax law trumps state divorce law. A local state judge is not authorized to re-write federal tax laws.
The previous list is only the beginning and is not meant as any specific legal or tax advice. If you find yourself in this situation, competent counsel should be sought as soon as possible to protect your legal rights and plan for a smooth and successful financial transition.