Tax Issues Divorced Couples Should Consider
Tax issues overlooked by divorced couples can have a major impact on the settlement, which is why couples need to carefully examine the tax consequences of their settlement so they understand the long-term effects on their financial future. Here are five tax issues to consider after filing for divorce.
#1: Tax Filing Status
When it comes to taxes, your marital status as of December 31, 2021, will determine your filing status. If you separated before the end of last year but haven’t officially divorced, then you can file a joint tax return. You can also choose married-filing-separately status or you can file as head of household if you didn’t live with your spouse for the last six months of the year, file separate tax returns, had a dependent in your home for more than half of the year, and paid more than half of the costs to maintain your home.
#2: Alimony Deductions
If you pay alimony to your ex-spouse as part of a divorce agreement that was established before the end of 2018, then it can be deducted from your taxes. This deduction is lost if the divorce agreement is altered after 2018 to exclude the alimony from your ex-spouse's income. Cash-only payments must be detailed in the divorce agreement in order to qualify as deductible alimony on your taxes.
#3: Claiming Tax Credits for Children
Although the custodial parent can claim the child tax credit or credit for other dependents for qualifying children, the noncustodial parent can claim one of these credits for a child if the other parent signs a waiver that says they agree not to claim an exemption for the same child on their tax return.
#4: Non-Liquid Assets
Non-liquid assets like pensions, 401(K)'s, thrift savings plans, IRA's, brokerage funds, and stock option plans have tax and penalty consequences when they are transferred in a divorce. Some of these funds can be transferred tax and penalty-free with a certified divorce decree, while others need a Qualified Domestic Relations Order for the transfer to be tax and penalty-free.
#5: Medical Expenses of Children
If you are still paying for a child's medical bills after the divorce, you can include the costs in your medical expense deductions, even if you aren’t the custodial parent. Medical expenses that exceed 7.5% of your adjusted gross income are deductible on your taxes.
McKinley Irvin’s legal team is committed to helping clients and their families navigate all areas of divorce. If you have questions for our family law attorneys about your divorce agreement, please call 206-397-0399 to request a consultation.