Divorce is ubiquitous. It’s basically an American institution at this point and really a cousin of marriage. In fact, it appears to be so common that the presence of divorce seems to be a factor in the decline of marriage rates, amongst other sociological phenomenon, but enough of my moralizing. The point is divorce has an effect on your taxes. This makes complete sense, assets have to be divested and divided, payments are ordered to be made, and filing statuses change. While this article is not completely exhaustive in its treatment of what could occur when someone gets divorced from his or her spouse, it touches on some very common points of interest.
If, due to a divorce, you’re unmarried on the last day of the year, December 31, then you cannot file a joint return as a married couple. Said another way, the year you get divorced through a valid divorce decree, you cannot file a joint return. However, if you’re separated from your spouse, then you’re still technically married and can’t file as a single person on your return. There is an exception for those that wish to file as head of household that are separated and “considered unmarried.” To be considered unmarried you have to: file a separate return; pay more than half the cost of running your household; have ceased to live with your spouse for at least the last six months of the year; live with your child and the child’s main home is with you; and be able to claim the child as your dependent.
Generally speaking, a child of a divorced couple is considered the dependent of the custodial parent, or the parent with whom the child lives with the majority of the time. Under standard custody arrangements, this is also the parent who has the child during the work week in normal times. A non-custodial parent can still claim the child if the child receives half of his or her support from the parents during the year in question; the child lives with one or both parents; and the custodial parent agrees to allow the noncustodial parent to claim the child by signing a written declaration expressing as much, which must be included in the custodial parent’s tax return for that year. Notice some things about this. First, the child can live with just the custodial parent, and not live with the noncustodial parent, and the noncustodial parent can still claim the child as long as the other requirements are met. Also, similar to the first point, the noncustodial parent does not even have to provide the majority of the support for the child. All that’s required is that at least one parent provide at least half the support for the child. Finally, the custodial parent must sign what amounts to a voluntary waiver of his or her ability to claim the child in favor of the noncustodial parent. There’s actually a tax form for this, which is Form 8332, Release/Revocation of Claim to Exemption for Child by Custodial Parent.
Until tax year 2018, alimony was expressly an above the line deduction that the payer could deduct against his or her income. In other words, if you were paying alimony, at least you could deduct the cost of that alimony on your tax return. Therefore, alimony was non-taxable to the payer and taxable to the payee. Again, it took some of the sting out of having to pay your ex-spouse. However, starting in tax year 2019 alimony is assumed not to be tax deductible to the payer, if the alimony was part of a court order granting that alimony in 2019 or later. To me, this seems a little unfair, but whatever. Not only is alimony not deductible from the perspective of the payer, but it is also not includable in the gross income of the payee, and therefore he or she does not have to pay taxes on alimony received.
Alimony granted before tax year 2019 (so, 2018 or before), is still deductible to the payer, but not if the court order has been modified to state that the alimony is now not deductible by the payer and not includable in gross income of the recipient. It’s also important to note what is not alimony. Child support, property settlements incident to divorce, payments associated with jointly owned community property, payments to maintain an ex-spouse’s property, and use of the payer ex-spouse’s property are all not alimony. By definition, alimony is payments made to an ex-spouse for his or her benefit from the income of the other ex-spouse, which are not expressly for the care and maintenance of the children of the marriage.
Qualified Domestic Relations Orders
A qualified domestic relations order, also known by the acronym QDRO, is a court order that divides an ex-spouse’s retirement account due to the fact that some or all of the funds in such account are deemed to be either community property or joint property, owned by both spouses. As a result, the ex-spouse receives either a cash payout or a rollover of the funds into a separate retirement account in his or her name. Any lump sum cash payout must be included in that ex-spouse’s tax return in the year received. If the account is divided and rolled over and a separate retirement account is established for the payee ex-spouse, then the amount is not taxable because it was rolled over and therefore never received.
The general rule is that property transferred from one ex-spouse to another due to a divorce decree or settlement results in no gain or loss to either the transferring ex-spouse or the receiving ex-spouse. Property in this sense includes both tangible and intangible property, but does not include services. In this context property also includes that acquired after the marriage ended but still subject to the property settlement under a divorce decree.
You may be asking, what is the basis in the property transferred from one ex-spouse to another? The answer is the same as the basis in the hands of the transferring ex-spouse right before it was received by the recipient ex-spouse, so the same as the ex-spouse who originally owned the property. This rule applies regardless of whether the basis is greater or less than the property’s fair market value.
Cost of Divorce
The cost of divorce is almost universally non-deductible. This includes legal fees, financial advice, counseling, and on and on. However, you may increase the basis of property transferred to an ex-spouse incident to a divorce decree by the amount of cost incurred to transfer that property, such as legal fees paid to prepare a warranty deed.
It’s advisable that you at least look into revising your Form W-4, Employee’s Withholding Certificate, upon divorce. The W-4 indicates to your employer the amount of income that should be deducted from your paychecks for taxes. Therefore, when you get divorced and your tax situation changes, due to less income or changes in dependents claimed, etcetera, you should revise the amount withheld to accommodate for those changes.
For more information on divorce and its effect on your taxes, see IRS Publication 504.
If you are having issues with taxes pertaining to a divorce, call Dino Tax Co at (713) 397-4678 or email us at firstname.lastname@example.org. Your first phone conversation with us is always free. Also, like us on Facebook at www.facebook.com/dinotaxco.