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6 tax tips for divorcing (or divorced) couples

Love trust broken_Kumars-Edit_Flickr-CC
Photo by Kumar's Edit via Flickr

I've been married a long time. To the same guy.

Marriage is not always easy and we don't even have a boss stirring up trouble between us.

But we've made it through the tough times. And now as we patch things up when we do have our differences, we joke that we're staying together because it would be a bigger hassle to divorce.

Sometimes, though, couples can't work through their troubles and decide to officially end their marriages.

When that happens, among all the other issues, there are tax matters to consider.

Here are 6 tax tips that could come into play if you and your current better half decide to go your separate ways.

1. Alimony is no longer a factor.
Before enactment of the Tax Cuts and Jobs Act (TCJA), when the end of matrimony led to the start of alimony, each parting partner felt tax effects. No longer.

The new tax law says that for divorces granted in tax year 2019 through 2025, alimony is not a good or bad tax factor.

The payer of alimony can no longer deduct the payments. That's too bad for that ex-spouse.

However, the recipient of the spousal support gets better TCJA news. Those payments are no longer taxable income.

Child support unchanged
The Tax Cuts and Jobs Act (TCJA) did not alter the treatment
of child support granted when couples divorce.
Those amounts remain non-deductible for the paying parent
and nontaxable to the parent receiving the payments
on behalf of the divorced couple's children. 

Note, too, the effective date of the formal matrimonial split.

If your divorce agreement was finalized by the court and/or formal divorce decree issued before the end of 2018, the pre-TCJA rules are grandfathered. That means both alimony deductions and taxes due on received payments remain in effect for you and your ex unless your divorce arrangement is specifically modified to comply with the new law.

2. Your filing status will change. 
The calendar also controls your filing status. It is based on your official marital status as of the last day of the tax year. So if your divorce is finalized on Dec. 31, even though you married the other 364 days, you are a solo taxpayer for that full year.

If you have no children, then both ex-spouses will file that year's tax return as single taxpayers.

However, if children are involved, the parent who gets primary custody generally can file as head of household and take advantage of more beneficial tax brackets and claim a larger standard deduction.

3. Exemptions have ended, but tax credits remain. 
The TCJA eliminated personal and dependent exemptions. However, the parent with whom the kids live for most of the year can claim a variety of child-related tax breaks.

The most popular one is the child tax credit that's worth $2,000 per child, with up to $1,400 of that being refundable. If a dependent child is too old to qualify for this credit — that's the case when the youngster is 17 or older — the custodial parent can claim the related $500 credit for each qualifying dependent.

When splits are amicable, parents often agree to share tax breaks even when the kids spend most of their time with mom or dad. The noncustodial parent, for example, can claim the child tax credit for the minor children when the other parent signs a waiver agreeing not to claim the tax exemption for the same children. To let the Internal Revenue Service know of this deal, the noncustodial parent will need to file Form 8332 with his or her return.

Be careful here. When a child is claimed as a dependent on more than one tax return, those filings get flagged by the IRS. That means you and your ex-spouse will likely share one more post-marriage experience, an audit.

4. Decide what to do with the house. 
Selling your residence is a great tax shelter, especially for jointly filing married couples. That didn't change under the new tax law.

A legally wed duo still gets to exclude up to $500,000 in home sale profit from taxable income. A single homeowner, however, only gets half that tax-sheltered savings.

So if there's a likelihood that neither spouse wants to keep the house long-term, look into selling it before the split or making compensatory arrangements for the spouse who'll keep it and get the smaller tax break when finally selling.  

5. Assess other assets. 
When divorces are nasty, sometimes one partner tries to hide income and assets before the process of breaking up begins. In these cases, you — more appropriately, your lawyer and forensic accountant — might need to use taxes to uncover hidden assets before the split.

Even when the property to be divided is clear, you need to carefully weigh the tax implications. Take, for example, a couple that has a tax-deferred retirement account and a regular investment account, both worth $100,000 each.

Spouse A gets the retirement money. Spouse B keeps the regular account. Fair, right?

Not so much when you look at the taxes.

When A starts taking money from the retirement account, taxes will be due at ordinary tax rates on the earnings that have been accruing tax-deferred for years. B, however, will be able to pay generally lower long-term capital gains tax on that account's withdrawals.

In this situation, the A might argue for additional assets to cover the expected higher tax costs.

6. Don't forget state taxes. 
There are 50 states, plus the District of Columbia, and those jurisdictions will have final say over the end of a marriage. They also could have some tax matters that a divorcing couples needs to consider.

A prime example here is what your state's laws say about your married if you live in one of the community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Your divorce attorney no doubt will be up to speed here, but make sure you also consult a tax professional as to what state laws will mean to your taxes as you consciously uncouple.

I hope you and your spouse remain as happily married as the hubby and I. But just in case, make sure you consider taxes when it's time to finally call it quits.

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Jenny Hills

The dissolution of my marriage is a really stressful and highly emotional event for me. And I really needed help to hire an attorney for my divorce process. Thank you for sharing these helpful tips.

Rose D. Nugent

Wow! There can be so many taxes in divorce. One must have to seek professional help to cater all the issues arise during it.

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