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.
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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.
Alimony taxation
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 payments as 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 impacts 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.
How the IRS defines alimony payments
To qualify as alimony or separate maintenance, the payments you make to your former spouse must meet all six of these criteria:
- You don't file a joint tax return with your former spouse.
- You make payments in cash, by check, or by money order.
- You make payments to or for a spouse or former spouse under an applicable divorce or legal separation agreement.
- Legally separated spouses cannot be part of the same household when making payments.
- Liability for the payment doesn't extend beyond the death of the spouse who receives payments.
- The payment is not child support or a property settlement.
Some divorce payments aren't considered alimony
When the IRS defines alimony, it also specifically excludes certain payments as not qualifying for alimony or separate maintenance treatment. These include:
- Child support
- Non-cash property settlements
- Payments to keep up the property of the alimony payer
- Payments for the use of the alimony payer's property
- Voluntary payments are not required under a divorce decree or separation agreement
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.
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Wisconsin
- Washington
- Texas
Where to report alimony on your tax return
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.
- If you're the person receiving alimony payments: You will enter the amount on line 2a. On line 2b, you must input the date of the original divorce or separation agreement. You're also required to give your Social Security number to the alimony payer, or you may face a $50 penalty.
- If you're the person making alimony payments: You'll enter the amount paid on line 18a. Alimony payers are also required to input the recipient's Social Security number on line 18b, and the date of the original divorce or separation agreement on line 18c. If you do not include the recipient's Social Security number, you may be subject to a $50 penalty.
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.
If you're required to report alimony income on your tax return and you forget to include this information, you'll be subject to the usual penalties and interest payments for underreporting your tax.
Ways to reduce your taxes during a divorce
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 dependents
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.
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In certain cases, the non-custodial parent may claim the dependent if they meet the following four requirements:
- The parents are:
- Divorced or legally separated under a decree of divorce or separate maintenance
- Separated under a written separation agreement
- Living apart at all times during the final six months of the year
- The child in question received over 50% of their support during the year from their parents
- The child is in the custody of one or both parents for more than 50% of the year
- The custodial parent signs Form 8332 declaring that they won’t claim the child as a dependent for the year and the non-custodial parent attaches the written declaration to their return for divorces occurring after 1984
Even if a non-custodial parent can claim the dependent on their tax return, claiming the child will not provide any advantage for certain tax benefits of the non-custodial parent. These include:
- Head of household filing status
- Child and dependent care expenses credit
- Earned Income Tax Credit
- Health coverage tax credit
- Exclusion for dependent care benefits
Choosing assets carefully
Dividing assets during a divorce usually don'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 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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