Filing for a divorce can cause some complexities in your tax situation. Learn how alimony is taxed and other tax reporting tips you should know while filing taxes after a divorce.
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When you're thinking about filing taxes after a divorce, you may want to know how your taxes will change. The federal tax impacts of divorce aren't as large as they used to be.
Each state has its own state income tax laws. How divorce-related payments and income are treated differs from state to state. Refer to your state's taxation authority to see how your state's tax laws will impact you.
Here are the major federal taxation areas related to divorce.
The taxation of alimony on federal tax returns recently changed because of the Tax Cuts and Jobs Act of 2017 (TCJA). Today, alimony or separate maintenance payments relating to any divorce or separation agreements dated January 1, 2019 or later are not tax-deductible by the person paying the alimony. The person receiving the alimony does not have to report the alimony received as taxable income.
Prior to the changes in the Tax Cuts and Jobs Act, alimony payments were tax-deductible by the person making the payment. The person receiving the alimony had to claim it as income on their federal tax return.
The Tax Cuts and Jobs Act also affects new changes to divorce agreements signed before January 1, 2019. In particular, alternations to the original agreement may change the tax impact of alimony payments. If your divorce papers are modified to explicitly spell out that the repeal of the deduction for alimony payments applies, payments under your divorce agreement will be taxed according to the new rules. Without any modification, the alimony payments for agreements entered into prior to January 1, 2019 are typically deductible by the payor and taxable income to the recipient.
To qualify as alimony or separate maintenance, the payments you make to your former spouse must meet all six of these criteria:
When the IRS defines alimony, it also specifically excludes certain payments as not qualifying for alimony or separate maintenance treatment. These include:
If a person paying alimony must also pay child support, but they do not fully complete the payment for both, payments would go toward child support first for tax purposes.
If you live in one of the states listed below, consider any property or income held by you and your spouse as community property. Payments that represent your spouse's portion of community property income are not considered alimony.
The IRS excludes certain payments as not qualifying for alimony or separate maintenance treatment, including child support, noncash property settlements, payments to keep up the property of the alimony payer, payments for the use of the alimony payer's property, and voluntary payments not required under a divorce decree or separation agreement.
If you have a divorce agreement finalized before January 1, 2019, reporting alimony paid and received on your tax return is easy. You simply input alimony paid or received on Form 1040, Schedule 1.
People with divorce agreements dated January 1, 2019 or after do not have to include information about alimony payments on their federal income tax returns since it is not considered income or a deduction.
If you're required to report alimony income on your tax return and you forget to include this information, you might be subject to the usual penalties and interest payments for underreporting your tax.
If you're going through a divorce, planning the divorce separation agreement can help you save money on taxes in the future. While alimony is no longer reportable as a deduction or income, other tax impacts could affect your future tax returns.
Claiming a dependent on your tax return depends on many factors. The custodial parent will generally claim the dependent, but the custodial parent for tax purposes might not be the same person who has legal custody. The custodial parent for IRS purposes is the parent whose house the child sleeps at the most number of nights during a year.
In certain cases, the non-custodial parent may claim the dependent if they meet the following four requirements:
Even if a non-custodial parent can claim the dependent on their tax return, simply claiming the child will not provide an advantage for certain tax benefits of the non-custodial parent. These include:
Dividing assets during a divorce usually doesn't result in a taxable event: You don't usually have to pay taxes on gains or losses at the time of the divorce. But, if you receive an asset in a divorce and want to sell the asset at a gain in the future, you'll have to pay the tax due on the whole appreciation amount, not just on the amount of appreciation that has happened since the divorce.
For this reason, it's essential to choose the assets you want in a divorce carefully. For example, getting cash from a bank account, doesn't result in a gain or loss. However, accepting $75,000 of stock with a $25,000 basis, means you'd also be taking a $50,000 gain that later would likely be taxed.
Choosing $75,000 of cash over the stock would be a more efficient tax choice. Most divorce lawyers are aware of these tax impacts. They will factor the tax consequences in the terms of divorce agreements.
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