Filing Taxes after Divorce
A divorce can affect every aspect of your life and financial situation, including how you file taxes and the amount of taxes you owe.
Filing taxes after divorce can be complicated. The end of a marriage can cause negative tax consequences for some people. The contents of your separation agreement, which states the terms of your divorce, will be the basis of how your divorce affects your taxes.
Our knowledgeable Raleigh divorce attorneys at Charles R. Ullman & Associates focus on protecting your rights and interests. We can assist you with every aspect of your divorce, including the division of assets and marital property and finalizing your separation agreement. In addition, we will carefully consider how the division of your assets affects your future tax liability.
What to Know About Your Tax Filing Status After a Divorce
Once you are divorced from your spouse, you will file your income taxes separately. It does not matter if you were married for 364 days of the year and divorced on December 31, then you’ll file that year’s tax returns separately from your ex-spouse.
You may file as:
- Single if you remain unmarried between the date of your divorce and December 31
- Head of household if you’re providing a home for a child, which could reduce your tax liability
- Jointly with your new spouse if you remarry by the end of the year
There may be tax benefits for you if you are a custodial parent or are considered the head of household.
Qualifying as head of household requires that:
- You are unmarried at year’s end
- A qualifying person lived in your home for more than half the year
- You paid more than half the cost of keeping up your home for the year
Your unmarried child is a qualifying person, even if you can’t claim the exemption for that child. Anyone else may be a qualifying person if they were financially dependent on you for more than half of the year, and you can claim the exemption for that person. If the qualifying person is your parent, they don’t have to have lived with you.
Deductions for Parenting Children after Divorce
As any parent who has ever filed income taxes knows, children claimed as dependents represent a substantial tax deduction.
By filing as head of household, you might be able to claim your children as dependents and claim these tax benefits:
- Earned Income Credit (EIC)
- Child and dependent care credit
- Exclusion for childcare benefits
Which parent may claim a child as their dependent depends on the child custody arrangement. The custodial parent is usually the parent the child lives with for more nights in the year. The other parent is the noncustodial parent.
The custodial parent can claim a child as their dependent. A noncustodial parent may claim an exemption for the child if the custodial parent agrees to release their claim to the exemption via IRS Form 8332. Even with the release, the noncustodial parent cannot claim EIC, childcare credits, or an exclusion for childcare benefits.
Child support payments are not deductible by the payer and do not count as income for the recipient. However, any tax refund you are due can be offset by the IRS for unpaid child support.
Spousal Support Deduction Eliminated
The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated deductions for alimony that paying ex-spouses could previously claim. Alimony is no longer counted as income for the ex-spouse who receives payments. The TCJA also eliminated the ability to deduct expenses associated with your divorce from your taxes.
The new alimony rule applies to any divorce or legal separation executed after Dec. 31, 2018, or for any divorce or separation executed on or before Dec. 31, 2018, but modified after that date, if the modification expressly provides that the TCJA amendments apply.
Alimony from agreements executed before Jan. 1, 2019, is deductible by the payer and is taxable income for the person who receives it.
Property Division and Taxes in a Divorce
One of the biggest tasks for a couple divorcing in North Carolina is determining an equitable distribution of marital property.
There are essentially three steps to the division of marital property:
- Identify assets as marital or separate property
- Assign a fair market value to individual pieces of marital property
- Determine an equitable division of marital property between the two parties.
For most married couples, the equity in a home represents their single most valuable marital asset. As a result, the disposition of the marital home often becomes a primary issue to resolve in a divorce. If neither spouse wants to stay in the family home, or if neither can afford to buy out the other, the option is to put the property on the market and divide the proceeds.
The status of your home as you divide property in a divorce can affect the amount you pay in taxes in a number of ways. For example:
- If you sell the marital home and divide the proceeds of the sale, a portion of that money may be subject to capital gains tax.
- If you buy out your spouse and remain in the home and then later sell the home to a third party, capital gains tax may apply to the sale.
- If you retain and remain in the marital home, you will be eligible to deduct the mortgage interest on your taxes.
- Whoever is listed as the owner of the home as of the date that property taxes are reported will be liable for property taxes. January 1 is the tax lien or assessment date in North Carolina.
Rights to IRAs and Pensions after Divorce
After the family home, a couple’s most valuable asset is often their retirement savings. This may include employer-provided pensions and/or federal programs, such as Roth IRAs, 401(k), or 403(b) funds invested by public school educators, nonprofit employees, and some members of the clergy.
Retirement funds that accrue during a marriage are typically treated as marital property, which must be divided equitably as part of a separation agreement.
When dividing retirement funds, vesting schedules applied to employer-sponsored pension/retirement accounts must be considered as well. Some plans grant partial vesting, such as 25% after three years with the company, 50% after five years, etc., with the eventual 100% vesting provided as an employee retention incentive. Vesting schedules may impact the value of an account at the time of separation, as well.
The value of retirement accounts must be established before negotiations may focus on an equitable division of the assets. It is best to avoid splitting retirement accounts in a separation agreement if possible.
It is preferable to find other assets of similar value to offer your spouse instead. If you must sell the assets of an investment account, you should negotiate the timing of the sale to maximize the return on your investment.
When a retirement account is divided, the proper execution of a qualified domestic relations order (QDRO) is usually required. This is a contract that directs the administrator of an employer-sponsored plan to distribute funds to alternate payees. It must be ratified by the court.
A QDRO is needed for qualified plans, such as 401(k)s and 403(b)s. Individual retirement accounts require an instrument called a transfer incident to divorce.
Money in a private pension fund, a 401(k) or a 403(b) is subject to taxation as income when withdrawn. Qualified withdrawals from Roth IRAs are not taxed.
Contact an Experienced Divorced Attorney Who Can Help You
A divorcing couple should strive to work in a businesslike manner to develop an equitable separation agreement to achieve the best possible outcome for both spouses’ tax liability after a divorce.
As your divorce attorneys, Charles Ullman & Associates would help guide discussions about child support, property division, alimony, and other decisions toward your stated goals and advise you so that your rights and financial interests are protected.
Before you make any decisions, our experienced divorce attorneys would listen to what you want and explain all of your options, including the financial and tax implications of each decision. Then we would be ready to work to obtain the divorce settlement you want.
When a divorcing couple in North Carolina cannot agree, they file a claim for equitable distribution in district court, and a judge decides. As your attorneys in a contested divorce, we would state your case and present supporting evidence while countering your spouse’s attorneys to protect your rights and interests.
Contact Charles Ullman & Associates today to engage a respected, experienced, and knowledgeable divorce attorney in Raleigh, N.C. Attorney Charles Ullman is certified by the North Carolina State Bar as a Specialist in Family Law. You can trust us to help you through the legal process efficiently and effectively as you transition to the next phase of your life.