Taxes and Divorce: What You Need to Know

Divorce Family Law Law

Taxes and Divorce: What You Need to Know

If you’re facing a divorce from your spouse, taxes are probably far down on the list of priorities. What many people don’t realize, though, is that getting divorced can have major tax implications that can affect your assets for years to come. At MGM LAW, we routinely work with tax accountants, realtors, and tax lawyers in addressing a client’s tax issues. As such, it’s important to think about taxes now, so you can help avoid financial difficulties down the road.

In this post, we’ll discuss the way a divorce could affect your taxes, and how you can protect yourself.

Let’s get started.

6 Tips to Navigate Taxes After Divorce

While splitting up is never easy, it shouldn’t be unnecessarily financially stressful. With that in mind, follow these six tips to make your first post-divorce tax season a little more bearable:

1. Think about your filing status for the upcoming year

Your marital status on December 31 determines your filing status for the coming year. That means that if you’re separated but not officially divorced at year’s end, you can still file your annual return jointly with your spouse. Alternatively, you can elect to file as married-filing-separately, which may cost slightly more but could be a better idea if your divorce is contentious.

Additionally, you can file as head of household, which offers a larger deduction, if you lived separately from your spouse for the last six months of the closed-out year, lived with a dependent for at least 50% of the year, and paid at least half of the upkeep expenses on your home – regardless of how long you were married.

To figure out which filing status is best for you; check with your Certified Public Accountant (CPA). This is a critical step that can help you avoid unneeded financial difficulties down the road as most family law attorneys do not give tax advice.

2. Look into available credits for kids

If you have custody of your child, you can claim the child tax credit or credit for other dependents and qualifying children. In 2021, the child tax credit is worth as much as $3,600 per child aged five years or younger, and $3,000 for children between 6-17 years old.

If you do not have custody of your child, you may be able to claim one of these credits if the other parent signs a waiver forfeiting their ability to claim an exemption for the child (or children) on his or her taxes. In Florida, mediation is required prior to scheduling a final hearing on a divorce, and normally the parents will agree to share equally in child tax credits and exemptions. If however, you go to Court and the Judge decides, the law requires that the parent with more than 50% timesharing receive the credits and exemptions.

Remember, a family law attorney is not a tax accountant so you should always enlist the advice of a CPA to make sure you’re getting all the beneficial credits you could be entitled to.

3. Prepare to handle alimony

If you pay alimony, you cannot deduct it from your taxes. If you receive alimony, it is non-taxable. Here’s what the IRS says about alimony in its most recent guidance on the topic:

“Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse if made under a divorce or separation agreement executed after Dec. 31, 2018.

This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, as long as the modification:

  • changes the terms of the alimony or separate maintenance payments; and
  • states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.

On the other hand, generally, alimony or separate maintenance payments are deductible from the income of the payer spouse and includable in the income of the receiving spouse, if made under a divorce or separation agreement executed on or before Dec. 31, 2018, even if the agreement was modified after December 31, 2018, so long as the modification is not one described in the preceding paragraph.”

If you have concerns about your tax relationship to alimony payments, be sure to speak with a qualified CPA or an attorney with a background in tax law.

4. Think about medical expenses

If you pay a child’s medical bills after the divorce is finalized, you’ll be able to include those costs in the medical expense deduction portion of your tax return, even if your ex-spouse is the child’s custodial parent and claims the child as a dependent.

According to Kiplinger,

“Medical expenses are deductible only to the extent they exceed 7.5% of adjusted gross income, but the child’s bills you pay could push you over the 7.5% threshold.”

5. Know how to handle asset transfers

If your divorce settlement will shift property between spouses, the recipient of the property will not be required to pay tax on that transfer. It’s important to note, though, that the tax basis of the property may shift.

This means that, if the recipient gets property settlements pursuant to a final divorce decree or a mediated settlement agreement and chooses to sell that property later, they will pay capital gains tax on the appreciation of the property.

If you’re dividing property, it’s important to keep the tax basis in mind. Work with your attorney and CPA to determine how best to avoid excess capital gains tax during this period.

6. Be careful if you’re selling the family home

If you decide to sell your family home as part of your divorce when you choose to do it matters. Up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home are exempt from taxation if you have lived in the home as your principal residence for two out of the last five years and you have not sold or exchanged another home during the two years preceding the sale. The method of holding a title does not matter. The title can even be held in a revocable trust.

If these standards have not been met, you may still qualify for a reduced exclusion. If you only owned and lived in the home for a year, for example, you may each be able to exclude $125,000 of that gain.

Work with a realtor, attorney, and CPA to make sure you’re not selling your home at the wrong time.

Protect Your Assets During Your Divorce

If you’re getting divorced, you could have a tricky financial road ahead of you. To make sure you’re not inadvertently paying more in taxes than you need to, work with a skilled Pensacola attorney to protect your finances. A lawyer with a background in taxes and financial services can help you protect your assets and stay on the right side of the IRS.

That’s why we’re here. At MGM Law, our team of skilled divorce attorneys will work with you to protect you at every phase of the divorce, from start to finish. Contact us today to learn more about our services or to request a consultation today.

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