The Federal Government, Taxes, and Your Divorce

Divorce can have a significant impact on your taxes. Many factors are at play, and you should talk with a tax preparer who is an expert in the intricacies of the tax impact on the newly divorced. The tax effect should be part of the negotiation process when dividing assets and determining child support since expected changes in the tax burden could affect the value of divided assets. 

Filing status

For tax purposes, a couple is considered married unless the divorce decree is finalized by December 31. Therefore, if your divorce were to be finalized on January 1, 2025, you may be divorced while preparing your 2024 taxes, but you will be considered married for the 2024 tax bill. During separation you could choose “married filing jointly” or “married filing separately” but you must both choose the same method.

As an alternative, if a couple has been separated for at least six months and one has primary custody of at least one dependent, that parent can file as “head of household” and the other must file as “married filing separately.” 

Each of these options affects the amount of taxes paid, especially if there is a significant disparity in income. Therefore, your filing status during the separation should be determined during your divorce negotiations.

Liquidation of assets

For most assets, if you simply transfer ownership from one spouse to the other, the transfer does not incur any taxes, even if it is in exchange for something tangible in the divorce agreement. For instance, if you let your spouse keep the furniture in exchange for another asset, as long as the paperwork is handled correctly, no one will owe tax.  Most of the time, for tax purposes, it’s considered a gift. However, other transactions could have significant effects.

Property tax and mortgage interest are common deductions on a family’s tax return. If the house is given to one spouse in the settlement, that spouse keeps the deductions but is also responsible for all the household expenses and taxes. If the house is sold and the profit divided, both spouses lose the deduction and they both may have to pay capital gains taxes.

Non-liquid assets such as IRAs, 401ks, pensions, and retirement plans can be divided in a divorce, but each asset has its own rules and its own paperwork. Check with the asset’s administrator to make sure you file the right documentation and that it is written in such a way as to avoid tax penalties, now or upon early withdrawal.

If you negotiate the exchange of valuable assets, such as a boat or jewelry, with the expectation of selling it, the negotiated value should include the likely capital gains tax you’ll have to pay on the sale.

Claiming dependents

Unless you negotiate differently in your settlement, the IRS rules that the parent with whom the children spend the majority of the year is the parent who deducts the children on their taxes. This parent may also be eligible for additional tax benefits, such as EIC, Child Tax Credit, Child and Dependent Care Credit, and educational or medical deductions.

Since 2018, alimony and child support are not deductible expenses by the paying spouse and do not need to be reported as income by the receiving spouse. 

Miscellaneous

Post-divorce, you may need to consider changing your tax withholdings, since your household has changed. If you change your name, be sure to inform the Social Security Administration. 

If you have been married for at least 10 years before divorcing, the spouse with the lower income is eligible to collect spousal Social Security benefits, even if the ex is remarried and even if the ex has not yet begun to collect. This applies if the spouse trying to collect is at least 62 years of age and is currently single. These rules are set by the IRS and are not part of your divorce negotiations.  

Negotiate right

At the Law Offices and Mediation Services of Elissa C. Goldberg, we aren’t tax experts but we are experts in negotiation. We understand that many of the decisions you have to make will have tax implications and we can negotiate a fair settlement that considers the future tax effect. You may still want to discuss the tax implications with a tax accountant who is an expert in divorce settlements, but we will work with you to make sure everyone walks away with a fair and satisfying agreement. Contact us at our Doylestown, Bucks County office, at (215) 345-5259 for a complimentary consultation.