Tax considerations during a divorce

On Behalf of | Sep 15, 2020 | Family Law

Divorcing spouses must navigate a great many decisions that may impact their financial futures quite significantly. 

While figuring out if or how they may split retirement accounts, keep or sell their family home or share other marital assets or debts, spouses must factor in the changes each decision may make in their income tax filing. 

Tax filing status post-divorce

Most married couples file income taxes utilizing the “married filing joint” tax filing status with the Internal Revenue Service. However, that must change once they divorce. The newly divorced spouse may file as a single person but may also qualify to file under the “head of household” tax filing status. SmartAsset explains that to claim that status, the person must be the spouse who claims one or more children as dependents and who pays the bulk of all household and living expenses. Only one of the former spouses may claim this status. The single tax filing status may result in the highest amount of tax assessment. 

Tax responsibility for spousal support payments

For many years, the spouse ordered to pay alimony was able to deduct the amount paid from his or her tax return. The spouse receiving alimony payments then claimed the money as income and paid taxes on it. The Tax Cuts and Jobs Act reversed that setup so that now the person who must make spousal support payments must also pay income tax on the money paid to the former spouse. 

Knowing that taxes must be paid by the party who also pays alimony may well result in some couples choosing to forgo alimony and instead make other agreements during a divorce.