When engaged in a heated battle of property division, taxes may be the last thing on a divorcing couples minds’, but considering the significant impact taxes have on the dollars left on the table, they should be at the top of the list. One misstep in planning often works to the benefit of the tax collector. Below we have summarized some key considerations in the tax arena that deserve attention when navigating a divorce:
This is one of the most frequently asked questions we receive from divorcing couples. The IRS considers a taxpayer who is married on the last date of the year as married, and that couple may file as married filing joint, married filing separate, or in some cases, as head of household. You are still considered married even if you are separated. You are only considered unmarried if you have obtained a final decree of divorce by the last day of the year.
As most people know, the filing status used on your tax return helps determine whether you can claim certain deductions or credits and affects your tax rate. A couple that is in the midst of divorce on December 31 can do appropriate tax planning with their tax professional to verify the status chosen is the most beneficial to both parties.
Alimony, unlike child support, is typically considered income to the recipient and a deduction to the payor. In order for this to be the case, certain criteria must be met: taxpayers cannot file a joint return, payments must be made in cash (including checks or money orders), the payment must be received by the former spouse in the year for which you are taking a deduction, the divorce or separate maintenance decree cannot state that the payment is not alimony, former spouses shall not be members of the same household when payment is made/received, there should be no liability to make the payment after the former spouse is deceased, and your payment must not be considered child support.
If you are the payor, you do not have to itemize to receive the deduction, rather the full amount paid reduces adjusted gross income on Page 1 of Form 1040. It is important to include the social security number of the recipient, or you could risk a penalty from the IRS and loss of the deduction.
As briefly mentioned earlier, child support is not taxable to the recipient, and is not deductible by the payor. To clearly decipher between alimony and child support, it is pertinent that the divorce decree defines the payment as “child support”. As both alimony and child support can have impactful tax consequences, a family law attorney should carefully word the divorce documents.
Please note that the Tax Cuts and Jobs Act (TCJA) made impactful changes to the alimony rules. Payments made via divorce agreements executed on or prior to December 31, 2018, will follow the same rules mentioned above on deductibility and inclusion in income. Alimony payments via divorce agreements executed on January 1, 2019, and later will not be deductible to the payor, and not includible in income to the recipient. There is a great deal of planning around this revision and it is highly recommended that couples consult with their attorney and CPA before finalizing documents.