Divorce…it’s rarely easy, and without a doubt, will impact almost every aspect of your life, including your taxes. This blog is designed to provide you with some guidance to make this life change a bit less stressful.
Here are some tax-specific matters to keep in mind:
Evaluate your tax filing status.
Your tax filing status is dependent upon your marital status on December 31st. Until you are legally divorced, the IRS considers you married for filing purposes. There are specific circumstances where a married individual could qualify as head of household, but generally speaking, a married individual would file as married filing jointly or married filing separately.
Keep in mind that fling separately is often the least favorable filing status since you lose access to some deductions and credits, but there may be non-financial reasons why this is the best filing status for you. You’ll also need to coordinate with your spouse if there are children to be claimed to ensure both parties know which child(ren) to claim. You also both need to either itemize deductions or take the standard deduction, so that also needs to be discussed.
Once you are legally divorced, your filing status will either be single or head of household (if you qualify), unless you re-marry before December 31st of the tax year.
Update your withholding forms with your employer(s).
Updating your withholding forms is a great way to avoid tax surprises. Changes in your filing status or the dependents you’ll claim, will impact your tax return. You may find that you need to withhold more in taxes and the only way to communicate this change to your employer is to file an updated Form W4 (federal and state, if applicable). Line items you may want to update include your filing status, the indication that you have a spouse that works, and/or the claim for dependents.
Who will claim the dependents, and when, for tax purposes.
Typically, the parent with custody of the child(ren) is who’ll claim them on their tax return. But if parents decide to split custody 50/50, they’ll need to decide who claims the child(ren). Children may be claimed every year, or parents can choose to alternate who’ll claim the child(ren). Be sure to document the decision to avoid unnecessary mixups. In the event parents are unable to agree, reviewing the IRS’ tie-breaker rules may be helpful.
Review the federal and state tax treatment of alimony and child support.
Certain alimony or separate maintenance payments are deductible by the payer spouse, making them taxable income for the recipient spouse. However, in the event these payments are being made under a divorce or separation agreement executed after 2018 (or before 2019, but later modified if the modification specifically addresses the deduction for alimony payments), then the alimony and separate maintenance payments made are are not tax-deductible, nor are they taxable income to the recipient spouse.
It’s important to note that the federal tax treatment differs from the state tax treatment if you are in New Jersey. In NJ, if you receive alimony from your spouse (or former spouse), it is taxable in the year you receive it. For the spouse making the payments, it would be considered a deduction so long as they’re not voluntary payments, which are not tax-deductible. This is true unless the divorce decree stipulates that the other spouse who is paying the alimony agrees not to claim it as a deduction – if that is the case, then the alimony paid to a spouse would be nontaxable income.
Child support payments are not considered tax-deductible by the payer, nor are they taxable income for the payee at the Federal level. This is also true for New Jersey.
Report property transfers.
Generally speaking, there is no recognized gain or loss on the transfer of property between spouses (or former spouses) if the transfer occurs because of a divorce. There may be the need to report the transaction on a gift tax return, but this is determined on a case-by-case basis.
The ASE Group team is equipped to help you navigate life changes, including changes in your family structure. If we can be of assistance, please do not hesitate to reach out.