Tax Issues to Contemplate in a Divorce

There are numerous financial issues that couples have to worry about while going through a divorce. While the division of the assets and the focus on child custody are understandable, people should ensure that they do not overlook the tax issues of a divorce. These can be complicated issues that often surprise people in their first year after a divorce, particularly if they have to pay more in taxes than in years past. Understanding and planning for changes in their tax situation after a divorce can prevent surprises and reduce the financial stress a person faces after the divorce proceedings have concluded.

Many couples receive sizable tax deductions while married which can significantly reduce the amount of money that they owe at the end of the year. Once the divorce is finalized, these deductions will disappear and each individual could wind up paying more in taxes than they were in the past. In order to plan for this, couples going through a divorce should speak to a tax professional about what their taxes will look like in the years following their divorce. This will make it easier to budget for when it is time to pay your taxes and prevent any tax penalties that could result from a failure to pay taxes on time.

Alimony was previously taxable to the recipient and deductible to the payor. However, that is no longer the case due to fairly recent changes in the tax law. Presently, alimony is non-taxable to the party receiving support and cannot be deducted from the party paying support. If the recipient’s only source of income is alimony, then they have little to be concerned about come tax season because they will not be paying any taxes on that income. The party paying spousal support unfortunately cannot deduct that payment from their earned income, so they will be paying taxes on all of their income instead of having the ability to reduce their taxable income by the amount of alimony they are paying.

Parents often wonder about claiming children as dependents on their tax returns once the divorce is finalized. While this can be a challenge, any parent listed as the primary caregiver is eligible to claim that child as a dependent and enjoy the tax benefits that follow. Parents can also discuss who claims the child as a dependent between themselves and the court may be able to order that the non-custodial parents receive the benefits of claiming the child as a dependent also. Parties will often agree to alternate the dependent on their taxes each year if they have only one child in common, or they may agree to split the children on their tax returns every year so they can each benefit from claiming a child when they have more than one child in common. Sometimes, a party’s income may be too high to even benefit from the deduction, so it would make more sense for the other party to have the benefit every year instead of alternating. It is important for parents with questions about this issue to discuss this process with a qualified professional to learn more. This will prevent confusion when tax season rolls around.

All parties contemplating a divorce should discuss any tax related concerns with a qualified professional. Most family attorneys are not tax experts. Therefore, a family attorney can direct parties to qualified tax attorney or an estate planning attorney who is more equipped to answer their questions relating to how their taxes will be affected by a divorce. Issues as complicated as a person’s taxes warrant special treatment and should be discussed with as many professionals as necessary for the parties to understand their situation and know how to best handle it moving forward.

** Note: This article is not meant to be taken as any form of legal advice. This is purely informational. For questions please contact your attorney, or schedule an appointment with Vilar Law directly.

Article updated October 5, 2020.