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divorce and taxes

Tax Issues In Divorces

April 15, 2016

A divorce is always difficult, even when it is without legal hassle. One of the problems that divorce brings is with taxes. Your filing status changes, your finances may fluctuate, and with it, your tax liability.

To manage the tax changes, gather as much information as you need, and seek help from a tax professional – especially before filing your return the first time after divorce. Taxpayers that are going through divorce proceedings or are newly divorced may find these tips helpful.

Filing Status

If you were filing jointly when married, your filing status will change to either ‘single’ or ‘head of household’ (HOH). To file as single or HOH, you will need to be:

  • Legally divorced as of Dec 31st of the calendar year for which you are filing taxes; or
  • Living separately for at least the last 6 months of the tax year; or
  • Have a legally binding separation agreement

If you are going through a divorce, you and your spouse may agree to file jointly to save taxes. If not, filing as HOH instead of single generally provides more tax benefits. The HOH filing status, however, has specific qualification requirements. For your specific situation, you should consult a tax professional.

Alimony and Child Support

Alimony is deductible by the payer. The recipient of the alimony needs to include alimony as income and pay taxes on it. The payer can deduct alimony whether or not they itemize deductions. They are required to use Form 1040, and not Form 1040A, 1040EZ, or 1040NR.

Remember that payments under a divorce decree can be alimony even if the decree’s validity is in question. A divorce decree is valid for tax purposes until the court holds it invalid.

Distribution of Marital Assets & Property

According to the IRS, “Generally, there is no recognized gain or loss on the transfer of property between spouses, or between former spouses if the transfer is because of a divorce.” You may, however, have to report the transaction on a gift tax return. The rule applies even if the transfer was in exchange for cash, the release of marital rights, the assumption of liabilities, or some other consideration.

You are not required to pay gift tax on a transfer of property to your spouse before receiving a final decree of divorce.

Deducting Costs of Legal Help

You can deduct legal fees paid for tax advice in connection with a divorce and legal fees to get alimony. The fee you pay to appraisers, actuaries, and accountants for services in determining your correct tax or in helping to get alimony may be deducted. However, you cannot deduct legal fees and court costs for getting a divorce.