Getting divorced involves various financial considerations, including dividing marital property and arranging alimony or child support payments. One thing that might not be at the top of your mind with everything else at stake is the tax implications of divorce. However, by anticipating how your divorce will affect your tax situation, you are better able to protect your financial interests.
How Divorce Affects Your Taxes: A General Overview
Under Internal Revenue Service (IRS) rules, divorce will result in various changes to your tax situation, which can have significant financial implications. For example, it will require you to change your tax filing status from married to single or head of household. The economic aspects of your divorce judgment – such as property division, alimony, and child support – can also have tax implications. The effects of divorce on your tax situation make it critical to seek experienced legal and financial counsel to understand your tax rights and responsibilities during and following your divorce.
Filing Status After Divorce in Alabama
One guaranteed tax implication of a divorce settlement or judgment includes a change to your filing status. You cannot file a tax return under a married filing status for the year in which you divorce. Instead, you must file either as single or head of household. A taxpayer can qualify for head of household filing status if they are not married, can claim a qualifying child or relative as a dependent, and paid over half the cost of keeping up a home for the year. Filing as a head of household allows taxpayers to access lower tax rates and a higher standard deduction.
Divorced couples with minor or dependent children may face complex rules regarding their eligibility to file as a head of household. In most cases, a custodial parent (the parent the child lived with for most nights that year) can claim the couple’s child as a dependent for tax purposes. However, a divorce judgment may allow a noncustodial parent to claim the couple’s child as a dependent permanently or in certain tax years. A custodial parent can still claim head of household status if:
- They remain unmarried.
- They paid more than half the cost of maintaining a home that was their home and the child’s main home for more than half of the year.
- Their child can serve as the parent’s qualifying child for purposes other than the dependency exemption or child tax credit.
Alimony and Tax Obligations
Some divorce judgments or settlement agreements may include alimony to one spouse. When filing taxes after divorce, the paying ex-spouse cannot deduct their alimony payments. Recipients also do not have to report alimony payments as taxable income.
However, this alimony tax rule only applies to divorce agreements and orders created or modified after December 31, 2018. For couples who divorced on or before this date, alimony is deductible by the payer and is considered taxable income for the recipient (unless the divorce decree has been modified to state otherwise).
Child Support, Dependents, and Tax Deductions
Child support obligations do not affect a divorced couple’s income taxes. The parent who pays child support cannot deduct their child support payments. The parent who receives child support also does not have to pay income taxes on those payments.
However, children can have other tax implications for a divorcing couple. For example, when a couple divorces, only one spouse may claim the couple’s children as dependents for tax purposes. Claiming a child as a dependent can provide various tax benefits, including qualifying for the Child Tax Credit, the Earned Income Tax Credit, or head of household filing status.
By default, the custodial parent can usually claim a deduction for the child. However, parties may negotiate, or the court may order a different arrangement as part of the custody and child support order. For example, a child custody/support order may have the parties equally divide their children for tax deduction purposes or trade the tax deduction, with one parent claiming the deduction in even years and the other in odd years.
Division of Assets and Tax Consequences
Dividing marital assets during divorce can have substantial tax implications for couples. For example, when one spouse receives possession of real estate during division, they may be responsible for paying property taxes unless the divorce order or agreement states otherwise.
Although spouses may not trigger tax liabilities when they transfer property between themselves in divorce, other transactions taken during property division can have tax consequences. For instance, selling a house or another capital asset to divide the proceeds during divorce may trigger capital gains tax implications.
Dividing retirement assets can also lead to significant tax penalties unless done through a qualified domestic relations order (QDRO). A QDRO directs a retirement plan administrator to pay part of an account’s benefits to the plan participant’s ex-spouse once the retirement account matures.
Why Should You Work with a Divorce Attorney and Tax Professional?
There can be significant tax implications to the various provisions you negotiate as part of a divorce settlement or the proposed terms of the court’s divorce judgment. You can best protect your rights and financial interests by working with a knowledgeable divorce lawyer and a tax advisor. These professionals can review the terms of a divorce settlement or judgment and explain how they may affect your tax status or tax liability. A divorce attorney can also negotiate with your spouse or their counsel or advocate on your behalf in court to pursue a settlement or divorce judgment that helps you achieve your financial and tax planning goals.
Get Legal Support for Divorce in Alabama
If you’re going through a divorce, it’s important to understand the tax implications so that you can better protect yourself and your financial future as you enter this new phase of your life. Along with a qualified tax professional, a skilled divorce attorney is a critical part of protecting your finances throughout the process.
At Leigh Daniel Family Law, we have over 30 years of experience guiding people through all aspects of the divorce process. Our efforts have earned us a five-star rating on Google and the praise of many happy clients, such as this one:
“Leigh was very straightforward and let me know exactly what to expect. I appreciated her honesty, which prepared me for the outcome. I felt she was invaluable in representing my interest.” – Tammy Elders
Contact Leigh Daniel Family Law today for a confidential consultation with an experienced divorce attorney to learn more about the tax implications of separation and divorce.
