Divorce and Taxes | What You Need to Know

Understanding Divorce And It’s Tax Implications

If you’re undergoing a divorce, the last thing on your mind is what rules may apply to your taxes during this phase. Whether or not you have received a final decree of divorce, you must follow state law and enter in the correct filing status so that the appropriate deductions and credits can be determined. Divorce and taxes can become complicated, but we’re here to help. Here are some tips to keep in mind:

7 Things You May Not Know About Divorce and Taxes

Your official filing status is dependent on whether you are single, married, or divorced by December 31st. If you received your final divorce decree or you are legally separated by December 31st, then you’re considered unmarried for the entire year. That means you shouldn’t select “Married Filing Jointly” as your status. If you didn’t receive your divorce decree by the last day of the year, you are considered married. In this case, you select “Married Filing Separately or Married Filing Jointly,” depending on which you qualify for. Filing as “Single” is not an alternative if you are still married.
You can be held accountable for joint and individual responsibility for any penalties, interest, and tax that is owed on a joint return that is filed before the finalization of your divorce. These responsibilities may be valid despite what your divorce decree states about your former spouse being responsible for amounts owed on previous years’ joint returns.
You must notify the Social Security Administration office about any name changes that occurred in your divorce process prior to filing your taxes. The name listed on your tax return has to match the name on your Social Security card.
If at any time during the year you received your final divorce decree or separate maintenance, you can’t receive your former’s spouse’s exemption. This is true even when you’re the one who provided full financial support to your former spouse.
Usually, listing a qualifying child as a dependent is allowable to the custodial parent who qualifies to particular IRS rules. If the divorce or a separation occurred during the year and both parents shared time with the child, one parent is able to claim the child but not both. There are particular IRS rules for this.
If joint estimated tax payments for the current year are made during the year of the finalization of the divorce, you or your spouse can claim all joint payments. Or, either spouse can claim partial payment. If you can’t come to an agreement on how to divide the payments, you must choose to divide the payments in proportion to each individual tax as written on your separate returns for the current year.
If you are ordered to pay your spouse alimony you are able to claim that money spent as a deduction on your tax return and the spouse must claim that money as income on their tax return.

What Happens When Transferring Your Home To Your Spouse?

If part of your divorce settlement orders a transfer of your home to your spouse or vice-versa, you will not recognize loss or gain. That’s true even if your receive:

Cash
Release of marital rights
Assumption of liabilities, or
Other consideration for the home.

If a transfer was made within a year after the divorce is finalized, it is considered incident to divorce. This is also true if the transfer is related to the end of the marriage and made incident to divorce through an original divorce instrument within 6 years after the date the process was finalized. If a transfer doesn’t meet the listed conditions, it is presumed that the transfer is not related to the end of the marriage.

When it comes to the sale of home exclusion of gain, an owner is treated as using a property as his/her principal residence during periods that use was granted to either spouse under a divorce instrument.

What Will Be Considered Alimony and What is Not Alimony When Filing a Tax Return

Alimony payments that you are ordered to pay to your former spouse are only amounts listed under your divorce instrument. Any money you voluntarily give to your former spouse outside of the instrument is not considered deductible alimony. Therefore, your former spouse can not include the additional amount as income when filing taxes either. How do you know what is considered alimony and what is not alimony?

If the following statements are all true, it is considered alimony:

Payments are a prerequisite of a separation or divorce instrument.
Neither parties file a joint return.
Payment is accepted in cash (that includes checks and money orders).
Payment isn’t listed as “not alimony” in the divorce instrument.
When payment is made, neither party resides in the same household.
After the death of the recipient spouse, payments are not required to continue.
Payment is not used as child support.

If ANY of the following statements are true, it is not alimony:

Issued payment is not a requirement on the divorce instrument.
The payee and recipient spouse file a joint return.
Payment is:
- Not made in cash.
- A noncash property settlement
- Spouse’s party of community income.
To be used as or maintain the payer’s property.
The description of the payment is listed as “not alimony” on the instrument.
Either spouse is a member of the same household and divorced at the time payment is made.
After the death of the recipient spouse, payment is still required.
Payment is used as child support.

The shared household of both spouses is considered one household. If one spouse is getting ready to move out and leaves no later than one month after payment is made, it is no longer regarded as one household. Spouses can remain being members of the same household until the divorce is final.

Note: Spouses can agree to designate otherwise qualifying payments as “not alimony” if a clear provision has been made stating that the payment will not be treated as alimony on the divorce decree.

Payments made to third parties under a divorce can also qualify as alimony. The payments will be considered to be received by the recipient spouse and paid to a third party. The recipient will be able to claim deductions for any items purchased with the alimony funds.

If the conditions of a divorce order one spouse to occupy the home that is owned solely by the opposing spouse, the homeowner’s payments for mortgage, insurance, repairs and real estate tax are not considered alimony. Although, payments for utilities may be considered alimony.

Is Child Support Deductible?

Child support is not taxable to the recipient nor deductible by the payer. Child support payments designated in a divorce are not alimony. Here are a few other things you should know about:

If payment is not specifically classified “child support” it will still be treated as child support when reduced either:

With the occurrence of a contingency related to a child (when the child reached a particular age or income level, leaves school, gets married, becomes employed, dies, or leaves the household).
At a time that is clearly related to such a contingency.

If alimony is ordered on a divorce instrument and payments are made in an amount less than what is required, the partial payment will first be applied to child support and the remaining amount will be used as alimony.

Rules and regulations related to divorce and taxes can become complicated. To avoid unnecessary tax penalties, please contact us to ensure that your tax return is properly filed.