Benjamin Franklin penned one of his most famous quotes shortly before his death. Writing to his friend, French scientist Jean-Baptiste Le Roy, he said, “…In this world, nothing is certain except death and taxes.”
However, the first part of that same sentence is quoted less often. “Our new constitution is now established; everything seems to promise it will be durable, but….”
Franklin was talking about the founding of a nation. Yet marriage, too, is an institution we enter with the hope and expectation that it will endure forever. Unfortunately, when it falls apart, among all the upheaval, emotional strain, and grueling details of a divorce, there are still—most certainly—taxes. And the complex tax implications can add an extra layer of headache and uncertainty.
If you’re going through a divorce, here are six key factors to be aware of as you prepare to file your taxes.
Begin early. If this is your first post-divorce tax year, don’t wait until the pressure of tax season is upon you—get started right away.
Hire a CPA or financial advisor. After the divorce process, seeking out yet another professional may be the last thing you feel like doing. But in addition to helping you sort through tax issues and financial punch lists, it’s an essential step in your declaration of financial independence (so to speak) from your ex. Especially if you and your spouse were sharing an accountant, working with your CPA can help you address broader aspects of your post-divorce financial future and avoid many financial pitfalls in your new life. Be sure to provide your new advisor with a copy of your divorce settlement and your previous year’s tax documents.
Some specific tax matters to be aware of:
Change in Filing Status. If your divorce became final before December 31, you will now file as “single.” You may be able to file as “head of household” if you’ve lived apart from your ex for more than six months, you file separately, a dependent lives with you more than 50% of the year, and you have paid over half the home expenses. Head of household status can offer an advantageous tax bracket and a larger standard deduction.
If your divorce was not yet final before the end of the year, you are still legally married, and the IRS says you must file as such for that year—this may save you money. You can opt for “married filing jointly,” but choosing “married filing separately” can help protect you from tax mistakes, fraud, or debt on your almost-ex’s part.
Income. Your taxable income may be affected by your divorce, based on alimony and child support. If your divorce was final before December 31, 2018, alimony and child support are deductible/taxable unless you modified certain aspects of your divorce agreement after December 31, 2018. Commencing with new orders entered after January 1, 2019 income from child and spousal support is no longer taxable at the federal level for the payee nor is it deductible for the payer.
State laws vary, however. In California, spousal and child support cash payments are taxable for the recipient and deductible for the payer, but the arrangement must be detailed in your divorce settlement. If you are the payer taking the deduction, you must report your former spouse’s social security number so the IRS can confirm that your ex has declared the support as income.
Dependents. In your separation agreement, make sure to include which parent will claim the child as a dependent (or if you have more than one child, which parent will claim which child). You may also agree to alternate years. Note that if an arrangement is not specified in the settlement, the exemption will automatically go to the custodial parent. If custody is shared equally, the parent with the higher AGI (adjusted gross income) can claim the child as their dependent.
It’s also important to be aware that although you can negotiate an arrangement regarding exemptions for dependents, only a custodial parent can claim the child tax credit. The child/children must have lived with the parent claiming the credit for more than half of the tax year and be claimed as their dependent. Only one parent can receive credit for a child, and it cannot be divided. If custody is shared 50/50, the divorced couple may make a special arrangement, such as trading years as the custodial parent.
Division of Property. Be sure to clarify issues surrounding real estate taxes and who has the right to claim significant deductions such as home mortgage interest, typically based on ownership, and who has paid the mortgage. If the mortgage is shared, each spouse’s deduction should be deducted proportionately to payments made. In some cases, especially with young children, a divorced couple opts to maintain joint ownership of the home, and deductions are split evenly.
This is by no means an exhaustive list. Numerous other tax considerations, including child care and medical expenses, home sales, investments, asset transfers, and more, have significant tax implications.
If you’ve come to the difficult decision that it’s time to end your marriage, the experienced family law attorneys at SFLG can help you sort through the host of legal and financial considerations and hire the appropriate experts for your circumstances. Schoenberg Family Law Group, P.C., helps clients establish priorities, choose their battles, and secure their fair share of the estate so that they will emerge from the divorce in the most advantageous financial position.
By Debra Schoenberg
