Tax Considerations When Divorcing or Separating

by | Mar 10, 2020 | Divorce, Separation

First off, you need to distinguish if you are legally Married, Separated, or Divorced. Sounds straightforward enough, but knowing your legal status is vital to your financial obligations. It can get complicated, but single filers have different tax brackets than their married counterparts. Did you know Divorce can profoundly change your taxes as well as your life? It’s better to be prepared when it comes to your federal income taxes. If you’re divorcing or separating, consult with a tax professional to determine your tax filing status, and to advise you on the most beneficial way to file.

I’m Getting a Divorce

Divorce doesn’t terminate you or your ex’s obligation to pay your fair share of federal income tax. Did you know if you divorce by December 31st of the tax-filing year, the IRS still considers you unmarried for the entire year, and you won’t be able to file a joint return?

What if You’re Separated?

Being separated offers the most confusing aspect of the divorce and tax process. If the courts haven’t issued a legal decree of separation, then you still have the option of filing jointly with your spouse, but once you obtain a final judgment of legal separation, you can no longer file jointly. 

Some things you’ll need to consider if you’re divorcing or separating:

  • Deciding on a new filing status
  • Selling the home
  • Deciding who claims dependent children
  • Dividing retirement accounts
  • Deducting legal fees

Divorcing or Separating: Your New Filing Status

So you’re no longer married, now what? Sorry, you can’t file your federal income taxes with the status of ‘married filing jointly’ or even ‘married filing separately.’ You will now need to choose between single or head of household, depending on how you qualify. There are benefits to filing as head of household. These include a higher standard deduction, eligibility for some useful tax credits, and often a lower tax rate. So, consult with a tax professional to determine if you’re eligible to file as head of household.

Selling the Marital Home

Getting divorced typically means separating your home into two households — that often includes selling the marital home. Divorcing or separating couples may choose to sell a house for several reasons. Maybe neither spouse can afford payments separately, or they can’t agree who should keep the property.

Now, if you sell your home at a profit, this could have implications for your taxes. You might owe a chunk of capital gains taxes on your percentage of the profit. However, many divorcing couples qualify to exclude part of those gains, which helps to escape getting hit with a large tax bill.

Now, if you’re already divorced, and both spouses end up with partial rights to the marital home, each could exclude up to $250,000 in capital gains. Then again, if only one of you ends up holding the property, that person could exclude just $250,000 as a single filer, or half the amount of the joint-filing and dual-ownership exclusions.

When Children Are Involved

After the divorce, you and your ex-partner can’t both file as head of household based on the shared support and care for the same child or children. Your children count as qualifying persons only for the custodial parent (the parent that the child lives with for most of the year). Take into account; divorce decrees usually determine who is the custodial parent.

The parent of the child(ren) live with for the least amount of time, or the noncustodial parent cannot use the child or children to claim head-of-household status. This is true even if the custodial parent discharges the right to claim the child by signing IRS Form 8332. That’s right; only one parent gets to claim a dependent child when filing taxes after divorce. Usually, the parent who gets the deduction is the custodial parent. But as mentioned, an exception can be made using Form 8332, which is signed by the custodial parent (releasing that parent’s claim) and then filed with the noncustodial parent’s taxes.  However, if you have more than one dependent child you may each be able to file as head of household by each claiming one of your children. Consult with a tax professional to determine if you are eligible to file as head of household.

Spousal Support and Child Support

As part of the divorce decree, you may be ordered to pay your ex-spouse spousal support. Plus, you may be obliged to pay child support. Each time money changes hands in either situation, and it’s essential to understand the possible effect on your taxes.

Let’s get into the detail  – If you were divorced by Dec. 31, 2018, you could deduct all the spousal support you’ve paid from your taxable income. If you receive spousal support as part of a divorce settlement before Dec. 31, 2018, you’ll then need to report it as income for the year and pay taxes on the income. But, tax reform has changed how the IRS treats spousal support. Divorced after Dec. 31, 2018, then you won’t be able to deduct any spousal support you pay. But the good news is if you’re the recipient of spousal support, you won’t have to include those payments in your taxable income.

Child support? Well, it’s never been tax deductible and wasn’t ever considered income for tax purposes. 

Shared Retirement Accounts

Here’s another critical issue that often arises in divorce settlements: What happens to my retirement plan?

In many cases, couples must split retirement benefits when a marriage ends. For example, one spouse may be entitled to a share of the other’s workplace pension. However, companies won’t pay pension money immediately, so both parties will have to wait to get their fair share.  Depending on the type of retirement account you may need to have a Qualified Domestic Relations Order (QDRO) prepared to divide the account. When the division of retirement accounts are made incident to a divorce, there are no taxes or penalties due.  

Deduct Those Legal Fees

Finally, one other essential issue to consider when filing taxes after divorce is; Whether you can receive a tax deduction for all those expensive legal fees you had to pay to end your marriage. Regrettably, the answer is probably no. But you should always consult with a tax professional to determine what you can actually deduct from taxable income.

Divorcing or Separating: The Bottom Line

There’s simply no right way to calculate the emotional costs of ending a marriage, but you can take measures to ensure that filing taxes after divorce goes as smoothly as possible. Make sure you notify the IRS of your new filing status, plus make sure you and your ex are crystal clear on who gets to claim the children as dependents. Also, prepare for any capital gains you may see on the sale of a home.

Always consult with a tax professional to best advise you on how to file your taxes.

Tammy J. Mercado

Tammy J. Mercado has a passion for helping her clients achieve their desired results. She listens and she personally and promptly responds to your texts, emails and phone calls. She offers real solutions to your legal matters. Tammy will carefully evaluate the legal issues in your case, provide you with sound advice and offer you the pros and cons of each possible scenario so you can meet your legal objectives. She encourages clients to participate in their own matters. Tammy believes that client participation is key to a positive result and to keeping attorney fees as low as possible. You can be sure that she will offer you straightforward, sound and honest advice in a professional manner, with integrity and excellence.

Before opening her own law practice, Tammy worked for many high-volume law firms. This gave her extensive, diversified experience in hundreds of complex family law cases as well as civil matters. She is admitted to practice law before all courts in California and the United States District Court for the Northern District of California. She is also a member of the American Bar Association, the Contra Costa Bar Association, the Alameda County Bar Association and the Bar Association of San Francisco. Tammy is also a member of the Rotary Club of Danville.

Tammy is a graduate of John F. Kennedy School of Law and holds a Bachelor of Science in business management from the University of Phoenix. Tammy is also a licensed real estate broker, which comes in handy for valuing property in family law cases as well as real estate matters in the civil arena.

During her off time, Tammy is an avid sailor who crews and races on various boats in the San Francisco Bay. Tammy approaches each case as she would any yacht race: by assessing the other’s strengths, weaknesses, experience, equipment, history and reputation. She is a member of the American Sailing Association, and she is a certified Coast Guard Auxiliary member.

HONORS AND AWARDS
Tammy was selected to receive the prestigious “Business Person of the Year” Award in 2017 for the San Ramon Chamber of Commerce.

Tammy is currently serving as Danville Rotary President for 2017 through 2019.

Mary C. Whipple, CFLS

Mary C. Whipple opened her first law practice in the summer of 2008. She previously was an associate attorney at the Law Office of Cummins & Holmes, a full-service civil litigation law firm in San Ramon. The majority of her experience is in family law, which includes divorce, custody, support, prenuptial agreements and domestic-violence restraining orders. Certified by the California State Bar’s Board of Legal Specialization, she is a specialist in the area of family law. Mary has also represented clients in a variety of non-family-law cases, including juvenile dependency, probate, breach of contract and employment disputes, to name a few.

Mary also previously worked as a contract attorney for O’Melveny & Meyers in San Francisco while simultaneously volunteering at the Bar Association of San Francisco’s Volunteer Legal Services Program, representing defendants in unlawful detainer actions. The program acknowledged Mary with an Outstanding Volunteer in Public Service Award in 2006 for her efforts in providing access to justice.

A seventh-generation Californian, Mary is a graduate of Loyola University Chicago School of Law. She earned her Bachelor of Science in criminology at Southern Oregon University in Ashland, Oregon. She is a member of the State Bar of California, the Alameda County Bar Association, and the Contra Costa County Bar Association.

In addition, Mary is active in her community as a member of the Ambassador’s Committee for the San Ramon Chamber of Commerce; a volunteer at the Contra Costa County and Alameda County Superior Courts, where she assists self-represented litigants in completing their divorces; and a member of Divorce Angel, where she provides information regarding family law matters to members of the community. Since 2007 she has been a volunteer judge for Alameda and Contra Costa County’s Annual High School Moot Court Competition. She is also a member of the Danville/Sycamore Valley Rotary Club. She was awarded the San Ramon Chamber of Commerce 2012 Business Person of the Year; and a graduate of the 2012 class of Leadership San Ramon Valley.

CERTIFIED LEGAL SPECIALTIES
Certified Specialist in Family Law by the State Bar of California Board of Legal Specialization