Divorce brings significant changes to your financial situation, and understanding the tax implications is crucial to avoid unexpected liabilities and maximize your financial health. From filing status to the division of assets, knowing how divorce impacts your taxes can help you plan effectively for your post-divorce life.
Your marital status as of December 31 determines your tax filing status for that year. After a divorce:
- If you are legally divorced by the end of the year, you must file as
single or, if you have dependents, as
head of household.
- If your divorce is not finalized by December 31, you may still file as
married filing jointly or
married filing separately for that tax year.
The head of household filing status often provides better tax benefits, including a higher standard deduction and lower tax rates, if you meet the eligibility criteria.
In case you were not aware, under the Tax Cuts and Jobs Act
(TCJA) of 2017, the tax treatment of alimony
(spousal support) changed:
- For divorces finalized before January 1, 2019: Alimony payments are tax-deductible for the payer and considered taxable income for the recipient.
- For divorces finalized on or after January 1, 2019: Alimony payments are no longer tax-deductible for the payer, nor are they considered taxable income for the recipient.
If you are modifying an existing alimony agreement (one intially made prior to 2019), the tax treatment depends on the terms of the modification and whether both parties
agree to apply the TCJA rules.
Child support payments are not tax-deductible for the payer and are not considered taxable income for the recipient.
There are other tax-related issues related to child support, however, and you should talk to CPA or seasoned family law counsel for more information. These are detailed elsewhere.
In California, community property laws dictate that marital assets and debts are divided equally. While the division itself is not taxable, certain transactions may trigger tax implications:
Retirement Accounts
Transferring funds from retirement accounts, such as 401(k)s or IRAs, typically requires a Qualified Domestic Relations Order
(QDRO). If handled correctly, these transfers are tax-free. However, early withdrawals without a QDRO may result in penalties and taxes.
Capital Gains Taxes
If you sell jointly-owned property, such as a home or investments, you may owe capital gains taxes. Understanding the tax basis and the gain on the sale is crucial to avoid surprises.
Primary Residence Exclusion
You may exclude up to $250,000 of capital gains from the sale of your primary residence
($500,000 if filing jointly) if you meet ownership and use requirements. Post-divorce, only the spouse living in the home can claim this exclusion.
As stated above, child support can raise tax-related issues. California’s guideline child support formula generally considers parents net income
(after taxes)in determining what the base child support amount will be.
For example, claiming dependents can significantly affect your tax return. Typically:
- Only one parent can claim the child as a dependent per tax year.
- The parent with primary physical custody usually claims the child, unless both parents agree otherwise in the divorce settlement.
- The non-custodial parent may claim the child if the custodial parent signs IRS Form 8332, releasing their claim.
Claiming dependents may also impact eligibility for tax credits like the
Child Tax Credit or the
Earned Income Tax Credit
(EITC).
Of course all of these considerations may impact the child support calculation under the California guideline child support formula. Be careful!!
Health Insurance
If you were covered under your ex-spouse’s employer-sponsored health plan, you might need to seek coverage through COBRA, your employer, or the healthcare marketplace. COBRA coverage allows you to remain on your ex-spouse's plan temporarily but may be costly.
Estate Planning and Taxes
Post-divorce, update your estate plan, including wills, trusts, and beneficiary designations, to reflect your new circumstances. Failing to do so could result in unintended tax liabilities or asset distribution.
Tax Withholding and Payments
Update your IRS Form W-4 with your employer to adjust your tax withholding. Changes in filing status, income, or dependents may affect how much tax is withheld from your paycheck.
Navigating the tax implications of divorce can be overwhelming. Consider working with:
- Seasoned
Family Law
Counsel: To ensure your divorce settlement aligns with your financial and tax goals.
- A Tax Advisor or CPA: To provide detailed guidance on your post-divorce tax strategy and help with filing.
- A Financial Planner: To create a long-term plan for managing your finances and minimizing tax liabilities.
Divorce impacts every aspect of your financial life, including taxes. Understanding these tax considerations and working with professionals can help you avoid costly mistakes and secure your financial future. For personalized advice and assistance with post-divorce tax planning, contact me for expert guidance.
Call: 949-756-0684
Disclaimer
This information outlines a few of the concepts that surround tax considerations post-divorce in the State of California. It is not intended to be, nor should it be construed as legal advice for any particular situation. Please seek advice from TLD Law or your personal attorney in your state or jurisdiction.
