Tax Tips for Divorcing Couples

Divorce and Taxes
Confused about income tax filing and your divorce? Tax season can be quite daunting for couples in the midst of a divorce or for anyone who is considering divorce.

Although it is best to discuss these matters with a divorce lawyer and perhaps even a tax accountant, here are some tips to help maneuver the murky waters of taxes and divorce:

Do divorcing couples file taxes jointly or individually?

Think Dec. 31. According to tax law, your martial status as of Dec. 31 of the previous year determines whether or not you file jointly or as an individual. In fact, some couples wait to file for divorce until after Dec. 31 so they can continue to file jointly one more time. For those couples who are in the midst of a divorce, one answer is to file taxes as “married filing jointly” or “married filing separately.” Why would you consider “married filing separately”? Some spouses may be worried about the other spouse not reporting all income or intentionally defrauding the IRS. By filing taxes as “married filing separately,” you can help avoid potential fraud charges.

Who gets to claim the children on their taxes?

Usually, the primary custodial parent has the right to claim a child or children on their taxes. For those couples whose divorce status is not yet finalized, however, the dependency exeption issue can become complex. A divorce lawyer can help by including a clause in the divorce settlement that states which spouse benefits from this tax deduction. For example, if one spouse doesn’t benefit from taking the child tax deduction, then the other spouse can claim it instead. Or, the divorce settlement may be written so the couple splits the tax exemptions for the children.

Is alimony taxable?

Normally, alimony payments are taxable income to the former spouse who receives them. However, if the divorce settlement states that alimony is not taxable, then it is best to attach the agreement to your tax forms. Also, alimony in a military divorce is not necessarily taxable.

Is child support taxable?

No. Child support can neither be claimed as taxable income nor as a tax deduction.

When it comes to taxes, how do divorcing couples divide assets?

Unfortunately, dividing assets when it comes to filing taxes in the middle of a divorce can be a complex matter, especially in the case of high net worth couples. If your divorce has been finalized, asset division should have been outlined in your divorce agreement. Here are some ideas to ponder when it comes to assets and taxes:

Are you selling your home? Mortgage and property deductions are normally divided equally although cost-basis issues may apply (ask a tax accountant for details).

Are you buying out the equity in your home? The spouse who has bought the house is usually entitled to the mortgage and property tax deductions.

Are you in the middle of the divorce process and not sure what to do about property division? File jointly or divide deductions equally.

Is one spouse liquidating a 401k or IRA account? Remember, the income gained from such liquidations is taxed (except for Roth accounts).  Look into a Qualified Domestic Relations Order (QDRO). This allows you to divide retirement accounts and potentially avoid taxes (consult a tax accountant for rules).

Related: Tax Questions During and After Divorce.