Last Updated on: 27th March 2023, 05:58 pm

Todd Spodek from Spodek Law Group here to help you navigate the tricky world of divorce and taxes. Trust me, you don’t want to overlook these eight crucial tax considerations when going through a divorce.

Time is Everything
When it comes to tax filing status, timing is key. Couples need to decide whether they should continue to file a joint return or choose “married filing separately” before the end of the tax year on December 31. Filing jointly can be risky for the lower-earning spouse because they can be held responsible for the taxes due. On the other hand, filing separately allows each spouse to report their own income and taxes. Make sure you also consider the timing of your divorce. Waiting to finalize the divorce until after December 31 may be more advantageous from a tax perspective.

Liability for Joint Returns
If you’re still married at the end of the taxable year and choose to file jointly, you and your spouse are jointly and severally liable for all representations made in the return. In other words, you are liable for both the tax liability arising from the return and for any fraudulent representations made in the return. So, review all tax documents before submitting them to the IRS and consult an accountant or tax attorney if necessary.

Dependency Exemptions
The parent who has physical custody of a child for most of the year is entitled to claim the Child Tax Credit, but this can be negotiated during the divorce. The dependency exemption can be allocated in different ways and can be used as a bargaining tool at the negotiation table.

Alimony Tax Treatment
Tax legislation passed at the end of 2017 eliminated deductions for many previously deductible expenses. For divorce agreements entered into after December 31, 2018, alimony payments are no longer tax deductible for the paying spouse and no longer taxable for the receiving spouse. However, alimony-paying spouses who enter into divorce agreements prior to that date can still take advantage of the deduction.

Property Transfers
When it comes to property transfers during a divorce, it’s important to understand the tax implications. Generally, property transfers made during the divorce are treated as non-taxable events for federal income and gift taxes. However, in certain situations, it may make sense to create a taxable event intentionally by structuring the transaction as a “true sale” more than one year after the divorce is finalized.

Tax Carryovers
Tax carryovers like capital losses, passive activity losses, net operating losses, and charitable deductions are considered to have inherent value, just like property. Make sure to discuss these carryovers early in the negotiation process to avoid any surprises come tax time.

Appropriate Tax Filing Status
Determining the appropriate tax filing status is critical. Couples need to decide whether they should continue to file a joint return or choose “married filing separately” before the end of the tax year on December 31. Filing separately allows each spouse to report their own income, exemptions, deductions, and credits, making each spouse individually responsible for the associated tax obligation.

Finalizing the Divorce
Choosing the appropriate time to finalize the divorce is crucial. Waiting to finalize the divorce until after December 31 may be more advantageous from a tax perspective. On the other hand, if both spouses are high earners, filing jointly could put them in the highest tax bracket, whereas filing separately would not.

Remember, poor tax planning can have costly consequences that may not surface until years after the final divorce decree. Don’t let that happen to you! Keep these eight crucial tax considerations in mind when going through a divorce.

What’s Your Filing Status?
The first thing to think about is your tax filing status. Are you going to file jointly or separately? It’s a big decision that can impact your tax bill in a major way. If you file jointly, both of you will be responsible for the taxes, interest, and penalties owed. If one spouse earns more than the other, this could be a problem for the lower-earning spouse. Filing separately means that each spouse is responsible for their own taxes. Plus, you might be able to file as “head of household” if you have a dependent living with you after the divorce. This status can be better for your taxes than filing as “single.”

Timing is Everything
The timing of your divorce is also important for your taxes. If you wait until after December 31st to finalize your divorce, you might get a better tax break. If one spouse earns a lot more than the other, filing separately could help you both. But if you’re both high earners, filing jointly could put you in the highest tax bracket, and filing separately might not.

Claiming Dependents
Make sure you understand the rules for claiming dependents. The parent who has physical custody of the child for most of the year is typically the one who can claim the Child Tax Credit. But sometimes it makes sense for the non-custodial parent to claim the credit. It’s something you should discuss with your attorney.

Alimony and Taxes
Tax legislation changed in 2017, and alimony payments are no longer tax deductible for the paying spouse and no longer taxable for the receiving spouse. But if you had an agreement before December 31, 2018, you can still take advantage of the deduction. It’s something to keep in mind as you negotiate your divorce settlement.

Property Transfers
Property transfers during a divorce can have tax implications. Usually, property transfers are non-taxable events for federal income and gift taxes. But there might be some situations where it makes sense to create a taxable event intentionally. Talk to your attorney to see if this applies to you.

Tax Carryovers
Tax carryovers like capital losses, passive activity losses, net operating losses, and charitable deductions have value just like property. It’s something to keep in mind as you negotiate your assets and liabilities. These carryovers should be discussed early on in the negotiation process.

Liability for Joint Returns
If you decide to file jointly, make sure you review all tax documents. You could be liable for any fraudulent representations made in the return, and trust might not be what it once was in your relationship. If you’re concerned about the accuracy of the return, have an accountant or tax attorney review it before you sign anything.

Dependency Exemptions
Finally, make sure you figure out who will claim any dependents. The parent with custody of the child for more than half of the year is usually the one who gets the exemption. But you can negotiate this, so keep it in mind during the divorce proceedings.