As emotionally draining as divorce can be, it also can cause financial headaches and, if handled improperly, lead to serious tax consequences. A well-planned divorce settlement takes into consideration potential tax consequences and seeks to minimize your tax liability.
At Charles R. Ullman & Associates, we focus exclusively on divorce and related family law legal services. Our founding attorney, Charles Ullman, is certified as a Family Law Specialist by the North Carolina State Bar.
We know your rights and protections under North Carolina law. We will work hard to seek the best possible outcome as we assist you in every aspect of divorce. To set up a confidential consultation, contact us today.
Basic IRS Rules for Divorced Taxpayers
Your separation agreement and divorce settlement may require several payments and transfers of property. Typically, any financial gain is taxable, and certain losses may be deducted from taxes. But the U.S. tax code is written with exceptions and variations that make taxes much more complicated than that.
First, if you are going through a divorce, you need to know whether your tax status has changed. If you were still married at the end of December 31 of the tax year, you are considered married for tax purposes.
If your divorce decree was handed down before December 31, you are considered single for the tax year. If you obtained an annulment, a legal declaration that no valid marriage ever existed, on or before December 31 of the tax year, you are considered unmarried.
Your marital status impacts your filing status, tax rate, alimony payments, and more. If you are still married, you may file a joint tax return with your spouse and receive certain benefits, such as the standard deduction for married filing jointly. If your divorce has been finalized, you would file as single or, in some circumstances, as head of household. However, if you are still married but live apart from your spouse, under certain circumstances, you may be considered unmarried and be eligible to file as head of household.
Filing as head of household has such advantages as a tax rate that will usually be lower than it would be if you claim a filing status of single or married filing separately.
Some married couples file separate returns because each wants to be responsible only for his or her own taxes. In almost all instances, if you file separate returns, you will pay more combined federal taxes than you would with a joint return, the IRS says.
Is Your Divorce Settlement Tax Deductible?
Let’s see how the tax code, as explained in IRS Publication 504 (2022), Divorced or Separated Individuals applies to certain payments and asset transfers typically found in a divorce settlement:
- Spousal support (alimony). Alimony or separate maintenance payments under a divorce or separation agreement completed after 2018 are not deductible by the payer and are not counted as income of the recipient. Previously, alimony paid before 2019 was deductible by the payer, and the recipient had to include it in income. This still applies if you are amending a 2018-year tax return.
- Child support. The IRS treats child support payments the same as it does alimony. The payer cannot deduct child support payments from their taxes. The recipient does not have to report payments as income.
- Transferred ownership of marital property. When a married couple divorces and their marital property is divided, the Tax Code says no gain or loss (thus no reason for taxation) is recognized for either party. This rule applies even if the transfer was in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations. Exceptions to this rule include certain transfers in trust and certain stock redemptions that are otherwise taxable.
- Transferred ownership of individual retirement accounts (IRAs). Retirement investments may be important considerations in elder couples’ or “gray” divorces. If a divorce settlement requires you to transfer all or part of your interest in a traditional IRA to your former spouse, it isn’t considered a taxable transfer. If you are divorced by the end of the tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA for that year. You can only take a tax deduction for contributions to your own traditional IRA.
- Pensions and retirement accounts. If you receive an eligible rollover distribution under a qualified domestic relations order (QDRO) as the spouse or former spouse of a participant in a qualified retirement plan (such as most pension and profit-sharing plans) or a tax-sheltered annuity, you may be able to roll it over tax-free into a traditional IRA or another qualified retirement plan. Benefits paid under a QDRO to a plan participant’s spouse or former spouse must generally be counted as income by the spouse or former spouse.
You should consult an accountant, a tax professional, or a qualified financial planner about your current tax return and planning for future tax payments.
Filing Taxes After Divorce with a Child
After you have divorced, only one parent can claim an underage child as a dependent. This benefit usually goes to the custodial parent the child lived with most of the time during the tax year. If a child lived with each parent for an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income, the IRS says.
But the noncustodial parent can claim a child as a dependent if the noncustodial parent paid over half of the child’s financial support for the year. This typically requires the custodial parent to sign a written declaration that he or she won’t claim the child as a dependent for the year, which the noncustodial parent includes in their tax return.
Contact Our Experienced Raleigh Divorce Lawyers
At Charles R. Ullman & Associates, we recognize that the tax and financial consequences of a divorce are important to plan for during the process of separation and divorce. Our experienced Raleigh, NC divorce lawyers will work to protect your rights and interests.
To schedule a confidential consultation with our Raleigh divorce lawyers regarding your options for divorce in North Carolina, contact us by calling us at (919) 263-2829 or by filling out our online contact form.