Tax season can be stressful under the best circumstances. If you are navigating taxes and divorce, or are in the process of ending your marriage, it can feel even more complicated. Filing status, dependency exemptions, support payments, and property division all have potential tax consequences that should not be overlooked. Consulting with a knowledgeable divorce and taxes attorney and engaging in careful planning can help you avoid costly mistakes.
At Manning & Clair, we regularly advise clients on how divorce impacts their financial picture, including taxes. Below are several important considerations to keep in mind regarding taxes and divorce during tax season.
Determine Your Filing Status for Taxes and Divorce
Your marital status on December 31 generally determines your filing status for the entire tax year. If your divorce is finalized on or before that date, you will typically file as Single or, if you qualify, Head of Household. If you are still legally married on December 31, you may file Married Filing Jointly or Married Filing Separately.
While filing jointly can offer certain tax advantages, it also creates joint liability. That means both spouses are responsible for the accuracy of the return and any taxes owed. If you have concerns about your spouse’s reporting or financial transparency, filing separately may offer protection, even if it results in a higher tax bill.
Claiming Children as Dependents
One of the most common questions regarding taxes and divorce involves who may claim a child as a dependent. In many cases, the custodial parent (the parent with whom the child resides for the majority of the year) has the right to claim the child for tax purposes. However, divorce decrees and separation agreements may allocate this benefit differently.
It is important to review your court order carefully. Claiming a child in violation of the agreement can lead to IRS disputes and potential penalties. Clear communication between parents and adherence to the terms of the decree can prevent unnecessary complications.
Understand Child Support and Alimony
Child support payments are not tax-deductible for the paying parent and are not considered taxable income to the receiving parent.
Alimony is treated differently depending on when the divorce or separation agreement was executed. For agreements finalized before January 1, 2019, alimony payments are generally deductible by the payor and taxable to the recipient. For agreements executed on or after January 1, 2019, alimony payments are not deductible by the payor and are not taxable income to the recipient under federal law.
If you are negotiating a divorce settlement, understanding these distinctions is critical when evaluating the true financial impact of support obligations.
Division of Property and Assets
Property division in divorce can also have tax implications. While transfers of property between spouses incident to divorce are typically not taxable at the time of transfer, future tax consequences may arise when assets are sold.
For example, retirement accounts, investment portfolios and real estate each carry unique tax considerations. Qualified Domestic Relations Orders (QDROs) may be required to divide certain retirement accounts properly. Failing to follow correct procedures regarding taxes and divorce can result in avoidable taxes and penalties.
Update Withholdings and Financial Information
After a divorce, it is wise to review your W-4 withholding, beneficiary designations and financial accounts. Changes in income, support payments and household status may require adjustments to avoid underpayment or overpayment of taxes. You should also ensure that your address and banking information are updated with the IRS and your employer.
Divorce affects more than your personal life; it reshapes your financial landscape as well. Proactive planning and sound legal guidance can help you navigate tax season with greater confidence and clarity.
If you have questions about how divorce may impact your tax obligations or financial future, the experienced divorce and taxes attorney team at Manning & Clair is here to help you understand your options and protect your interests.
Contact Manning & Clair
At Manning & Clair, our Ohio family law attorneys provide experienced, compassionate guidance so you can make informed decisions about your rights, taxes, and financial future. Contact us today at 440.266.0700 to schedule an appointment.
Manning & Clair Note: The information shared here is intended for a general overview and discussion of the subject. It is not intended to be, and should not be used, as, a substitute for taking legal advice in any specific situation. Please consult an attorney for advice about your individual situation.
