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Divorce affects every aspect of your life, including your taxes. We are frequently asked about the timing of divorce as it relates to taxes, and if divorce payments and alimony payments count as deductions. Read on to learn more about filing taxes after divorce.
Disclaimer: Bivek Brubaker & Prescott is a family law firm in Marietta, Georgia. You should contact a certified professional accountant (CPA) for official tax guidance. The information presented here reflects general industry knowledge as well as the experiences of our clients.
Filing Your Joint Tax Return
You and your spouse must be married on December 31 of the calendar year in order to file a joint tax return. Compared to “married filing separately,” the “married filing jointly” arrangement often qualifies for better tax deductions, which allows you to retain more of your earned income. When spouses are close to finalizing their divorce toward the end of the year, we ask them to consult with a CPA. A qualified accountant can determine if the couple should wait until January to finalize the divorce, which would allow them to file jointly.
Tax Deductions
When negotiating settlement terms, it’s important to discuss tax deductions. The primary deductions are:
Both mortgage interest deductions and dependency exemptions can be split, or shared, by the two individuals. If the Divorce Agreement or Court Order doesn’t specifically address dependency exemptions, then the IRS will typically award them to the primary physical custodian. Remember, Settlement Agreements are public record, which is why you need a qualified attorney. They can craft language to ensure that exemption decisions reflect sound financial logic rather than being misconstrued as parents picking favorites.
Alimony
Alimony can be a win-win by serving as a tax shelter to the high-income earner while also providing support to the financially-dependent former spouse. Alimony will be taxable or non-taxable based on the Divorce Agreement or Court Order and the type of payment. A number of factors will affect this discussion, including each person’s tax bracket and how the marital estate is structured.
Lump-sum alimony payments, whether they are one-time or installments, are not deductible by the person responsible for paying alimony. Typically, lump-sum alimony agreements cannot be changed later down the road.
Periodic alimony payments, on the other hand, are deductible to the person responsible for paying alimony. The payments are also taxable to the recipient. Unlike lump-sum arrangements, periodic alimony agreements are modifiable.
Be aware of the recapture rule that applies when alimony awards decrease or end during the first three calendar years after your divorce. The recapture rule involves paying taxes on alimony payments you as the payer have previously deducted, which can be a significant financial burden. If you are likely to trigger the recapture rule, a qualified attorney will encourage you to seek the guidance of a CPA so that you can benefit from their expertise in this complex tax situation.
Division of Assets
The division of assets in a divorce usually does not affect your income taxes. Assets are not taxable, regardless of which spouse receives the item. Retirement accounts, investment accounts with stocks and/or bonds, and real estate can be transferred or split without any tax consequences to either party.
Regarding retirement accounts, there are special allowances in divorce situations. A spouse can withdraw funds without incurring the early withdrawal penalty. Instead, the special allowance only incurs the less-burdensome income tax penalty. Consult with your CPA to ensure these transactions are performed properly.
When filing taxes after divorce, you need qualified experts to assist you. The Marietta family law attorneys at Bivek Brubaker & Prescott have years of experience dealing with all types of divorce cases. We would be happy to speak with you to answer any questions you have about your divorce. You can contact us or call 404-793-6530 to speak with one of our highly qualified family law attorneys.
