How will divorce affect my taxes? Eventually, almost every person going through a divorce must address this question. As you might imagine, divorce affects your federal tax return in numerous ways. The issues that arise most frequently include tax filing status, exemptions, alimony, retirement accounts, and property transfers.
One of the first questions that divorcing spouses must address relates to filing status. Many times, spouses have been “Married Filing Jointly.” Often one spouse has handled the taxes, or maybe there is a tax professional who has taken care of it, and a spouse does not have much familiarity with the family’s tax circumstances. So what happens when you divorce? This is an important question because if you are not careful, you could end up with tax liability for your spouse’s actions after the divorce. Couples cannot file as “married filing jointly” during the year of divorce, so the treatment of year of divorce income is an issue deserving specific attention in any divorce.
Many divorcing couples also need to address who will claim a child as their dependent for tax exemption purposes. Generally, the custodial parent of the child is the one who can claim the dependency exemption for that child. The non-custodial parent can only claim the exemption where the custodial parent agrees and releases the claim to the exemption in writing.
Texas does not allow for court-ordered alimony, but in cases where the parties agree to contractual alimony, tax considerations also arise. The IRS defines alimony as a payment from a spouse or former spouse to a spouse or former spouse under a divorce decree. The payments must also be made in cash to a (former) spouse residing in a separate household and must end on the death of the receiving spouse. The individual paying the alimony can deduct the payments from their taxable income, and the individual receiving the payments must report the alimony payments as income on their tax return. This tax treatment can impact the appeal of contractual alimony as an element of settlement negotiations.
There are many other tax issues related to property division that arise during the divorce process, and those issues will be the subject of future posts on this blog. If you have any questions about the divorce or any of the topics addressed in this blog, be sure to contact an attorney at McClure Law Group for further information.