Tax Issues in Divorce

Tax and Divorce - Seattle Divorce Services

I saw a good article by Robert Bordett called “What Are The Tax Implications Of Divorce?“. Several issues to be aware of are:

Your marital status for tax purposes is determined as of the end of the year. In other words, if you finalize your divorce on December 31, 2014, you are considered single for purposes of your 2014 Federal taxes. On the other hand, if you wait until January 2, 2015 to finalize your divorce, you are considered married for purposes of your 2014 taxes. However, you should consult a tax professional as there are circumstances where you may be able to file as single if you have been separated.

The IRS generally allows the children’s tax exemptions to the parent with the majority of time with the children. However, your child support order can divide the exemptions differently. Very often, the exemptions are divided equally between the parents based on the fact that both parents are contributing their share of the support of the children, regardless of where the children are living. The IRS may require the filing of a special form with your taxes outlining which parent is entitled to which exemptions.

Child support payments are not tax deductible. The theory is that the child support is simply covering that parent’s share of the cost of raising the children, not providing additional income to the other parent. On the other hand, spousal support payments are deductible, shifting the tax burden to the spouse receiving the support. This is because the spousal support is intended to provide additional income to the other party to meet their own expenses. However, there can be circumstances where the spousal support is not deductible (such when it is paid in a lump sum), so again, be sure to consult with your tax professional.

Finally, you are not taxed on property you receive in a divorce, because you are simply receiving your share of something you already owned. Of course any taxes that would have been owed when the property was liquidated during the marriage would still be owed when it is liquidated after the divorce as well. This might include capital gains or deferred taxes on pre-tax retirement investments. Note that some retirement accounts can be transferred to the other spouse in a divorce without penalty or tax consequences, using a QDRO (Qualified Domestic Relations Order).