Don't Mess With Taxes

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The U.S. Census Bureau's Current Population Survey Annual Social and Economic Supplement (CPS ASEC) shows that family-related reasons were a driver for more than a quarter, or 26.5 percent, of households between 2021 and 2022.

Some of the moving vans were called to combine or create new family abodes as people who had put off wedding plans during the COVID-19 pandemic finally said "I do."

In other cases, it was couples splitting their partnership and possessions, possibly due to too much time together during coronavirus lockdowns.

There are tax implications when marriages begin and end. I'm a big fan of the former, having been married to the hubby for longer than some of you readers have been around!

But with today's coverage of super model Gisele Bündchen's remarks on her divorce in 2022 from former NFL star quarterback Tom Brady (yes, I spent way too much time reading about it online, which is part of the reason this post is so late), divorce is top of mind.

So here's a look at some key tax factors, which I'm sure both Gisele's and Tom's tax people took care of, that we less famous separating or divorcing couples also need to consider.

1. Update your tax withholding. Ideally, couples take their spouse's income into account when deciding how much withholding to have taken out in each of their separate paychecks. That process needs to be revisited now that they no long will report joint earnings.

Update your tax withholding by giving your employer or the payroll service the company uses a new Form W-4, Employee's Withholding Certificate.

The IRS' online Tax Withholding Estimator can help you calculate the correct amount to report on your new W-4.

2. Note the alimony tax changes. In case you missed it because you were happily married back when the Tax Cuts and Jobs Act became law, this tax reform measure changed the treatment of alimony for both former spouses.

Before the TCJA changes, alimony payments were deductible for the person making the payments, and the recipient of the spousal support had to report it as income.

Now for divorces or separation agreements in 2019 or later, alimony payments generally are not tax deductible by the payer spouse, and the ex-spouse receiving the funds does not have to include the amount as taxable income.

While many individual provisions of the TCJA expire at the end of 2025, the alimony changes are permanent and will not sunset then.

Note, too, one crucial component of many divorces that tax reform didn't change. Child support is never deductible and isn't considered income.

Where a divorce or separation instrument provides for alimony and child support and the paying spouse remits less than the total required, the payments apply to child support first. Only the remaining amount is considered alimony.

These are general tax rules when it comes to alimony, but be careful. Like taxes, divorces are very personal, and where money and children are involved, can quickly become complicated.

Check with your tax advisor and divorce attorney — and yes, you need specialists in both areas — about specifics related to your marital dissolution or any subsequent modifications and how they might affect the tax status of any alimony or separate maintenance payments.

3. Determine your new filing status. Speaking of status, your filing status is going to change.

First, the timing. Your tax filing status is determined by the last day of the tax year.

If, for example, a couple is still legally married on Dec. 31, then they are considered married for the entire year and must either file a joint tax return or send in two 1040s as married filing separately.

You might think filing separate returns is the way to go, but also run the numbers for joint filing. Even if your split is not amicable, it could be worth filing jointly one last time to save some tax dollars. Or, if one soon-to-be-ex-spouse has concerns about the other's unreported income or disagrees with their tax deduction choices, a separate return could be better in the long run even if it costs a bit more.

Dec. 31 also is the key date if your divorce is finalized on the last day of the year. In this case, the other 364 days don't matter to the IRS. The tax agency considers the spouses as divorced for the entire year.

So you each file as single taxpayers, right? Wrong.

The spouse who doesn't have primary custody might select the single filing status, but the spouse who is responsible for the pair's children most of the tax year can file as head of household.

4. Decide who gets child-related tax breaks. Raising a family isn't easy when both parents are together. It, and related taxes, get more difficult after a formal split.

Divorced or separated parents now must do some additional tax planning.

Generally, the parent with primary custody of a child can claim that child on their tax return. Listing the youngster as a dependent give the custodial parent the option to claim a variety of child-related tax breaks, such as the Child Tax Credit and tax credit for the youngster's care expenses.

However, when parents split custody fifty-fifty, they'll have to decide which parent claims the child and gets the associated family-friendly tax benefits.

If the parents can't agree, they need to check out the tie-breaker rules in IRS Publication 504, Divorced or Separated Individuals.

5. Properly change your name. Some folks who took their former spouse's name when they married decide to return to their pre-marriage name after a divorce.

That's fine, but make sure you make the change official with the Social Security Administration (SSA) before you file your first post-divorce return with your changed name.

If the SSA doesn't have your name matched to your Social Security number, you'll likely have some filing problems. The name on your tax return must match what's in the SSA's records.

6. Take all property transactions into account. Usually, if a taxpayer transfers property to a spouse or former spouse because of a divorce, there's no recognized gain or loss on the transfer. However, some may have to report the transaction on a gift tax return.

And speaking of property, specifically real estate, consider the tax implications of the residence you shared.

In many cases, the spouse who gets custody of the children wants to remain in the home so as not to disrupt the family routine any more than the divorce already has. But you need to consider the potential tax cost when that house is eventually sold.

Where a couple sells a home while they are filing jointly, up to $500,000 in gains from that sale are tax-free. The house only has to have been their principal residence for two of the last five years.

However, if one spouse sells the house after the divorce, that divorced seller only qualifies for a $250,000 deduction.

Depending on the value of your home and the housing market in your area, it might be worth selling the house before the divorce is final and splitting the larger tax-exempt profit.

7. 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 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 nine 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 have for many, many, many (OK, you get the idea) years.

But just in case, make sure you consider taxes when it's time to finally call it wedded quits.

You also might find these items of interest:

• Dec. 31 wedding and divorce tax matters
• Determining child-related tax breaks when you're divorced
• 6 signs married couples should consider separate tax returns
• Dealing with Divorce Dollars + Cents, Austin Woman Worth column

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