Divorce and Taxes: Alimony and Tax Implications
Divorce is a challenge for the vast majority of couples, and it’s made more complex by financial entanglement and the presence of dependents. When a marriage is dissolved, assets must be allocated, finances must be separated, and support payments – either alimony, child support or both – must be secured.
As you might expect, there are plenty of tax and financial-related questions to answer when dissolving a marriage. Let’s examine some of the most common concerns regarding divorce and how they relate to tax matters.
How Divorce Affects Filing Status and Previous Joint Tax Returns
The IRS considers a taxpayer’s martial status on December 31 of the relevant tax year for filing purposes. Put another way, if you’re married on December 31, 2022, then filing options for the 2022 tax year include the following, and only the following:
- Married, filing jointly
- Married, filing separately
- Head of household (if applicable)
Likewise, if the divorce is official on December 31, 2022, you may only file as single or head of household. If an individual undergoes a name change as part of the divorce process, they should quickly alert the Social Security Administration, which can be done by contacting a local SSA office. A taxpayer’s name must match what is on their Social Security card to file a return.
Also, if you previously filed joint tax returns with a former spouse, know that you may be held responsible for any outstanding tax liabilities on those returns. That’s true even if a court order (divorce decree) specified that your former spouse would assume responsibility for any outstanding liabilities.
For couples who made joint estimated tax payments during the year of the divorce, either spouse may claim all the payments, or both spouses may partially claim them. If the couple cannot agree on the division of the payments, they must be divided in proportion to each spouse’s tax for the current year’s return.
Who Can Claim a Dependent After Filing for Divorce?
If minor children or other dependents are present, they may only be claimed on one of the spouse’s tax returns. Therefore, determining who qualifies to claim the dependent (the custodial parent) is the matter of concern.
Whoever the child spends the majority of their nights with throughout the year – that parent is the custodial parent. If the child lived with both parents during the year of the divorce, then whichever parent they spent the most nights with following divorce that year is the custodial parent for claiming purposes.
Custodial parents may claim dependents, or they may release their right to make such a claim. This is officially done through IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. A substantially similar statement will suffice if the spouse asserts their intention to avoid claiming the dependent on their taxes.
If the non-custodial spouse intends to claim dependents on their return, they must include a copy of Form 8332 (or substantially equivalent document) with it.
Tax Ramifications of Divorce-related Property Settlements and Transfers
It’s common for a home to be sold or transferred following a divorce, and there are a couple of tax rules to apply when this is the case. Those rules include:
- Transferring the home to a former spouse – If the home is transferred to a former spouse incident to divorce, you will not recognize gain or loss on the transaction.
In this context, home transfers are “incident to divorce” if they are completed within one year of divorce being finalized or if the transfer is made under an original or modified divorce instrument within six years after the date the marriage ends.
- Sale of residence and sale of home exclusion gain – For the purposes of the sale of home exclusion of gain, the owner’s home is considered their principal residence during any period of time that a former spouse uses it under the conditions of a divorce instrument.
Alimony, Child Support and the Tax Rules Following Divorce
Alimony and child support are maintenance payments agreed upon during marriage dissolution. Any payments voluntarily made outside of the divorce instrument are not considered alimony and will not be factored toward alimony obligations.
If the divorce instrument was official before January 1, 2019, the spouse paying alimony may deduct the payments and the spouse receiving payments must pay taxes on them. Following January 1, 2019, the situation has been reversed. Any divorce instrument executed past this date has changed the alimony rules – now, the paying spouse must add alimony payments to their income, while the receiving spouse may deduct them. If a divorce instrument is modified after this date, it is subject to the new alimony rules.
Here are a few additional alimony rules to consider when filing taxes:
- Designating payments as “not alimony” – Spouses involved in a divorce may treat otherwise qualifying payments as not alimony under the conditions of a divorce instrument. These payments are not added to alimony, but alimony must still be paid in full. Both spouses must agree and must sign a decree stating their desire to make payments outside of alimony. A copy of this decree must be included in the alimony recipient’s return.
- Paying third parties using alimony – Payments made to a third party may be treated as alimony if specified through a divorce instrument. The payments are treated as received by the spouse and then paid to a third party. As such, alimony recipients may deduct any payments made to a third party as if they had received them directly.
- Home ownership, occupancy and alimony payments – If, through a divorce instrument, a spouse occupies a home owned by their former spouse, any mortgage payments, insurance, real estate taxes and repair costs made by the owner are not treated as alimony payments.
- Alimony and child support payments – Child support is treated like alimony for deduction and taxation purposes. The payer may not deduct child support and the recipient is not liable for taxes related to child support payments.
Child support is not alimony. If maintenance payments are insufficient to cover both alimony and child support, the payments are first allocated to child support.
Here’s a quick breakdown of what constitutes as alimony and what doesn’t:
Payments to a former spouse are considered alimony if all of the following are true:
- Payments are required by a divorce or separation instrument.
- The payer and recipient do not file a joint tax return.
- Payment is in cash, money order or check.
- Payments are not designated as “not alimony” under the divorce instrument.
- Divorced and legally separated spouses are not members of the same household when payments are made. Until separation is finalized, spouses may remain in the same household without invalidating alimony payments.
- Payments are not required after the death of the recipient spouse.
- Payments are not treated as child support.
If any of the above are true, or if payments are made for the upkeep or use of the payer’s property, then payments are not considered alimony.
Work with a Reputable Houston Tax Attorney to Eliminate Confusion on Divorce and Taxes
Divorces can pose a huge array of challenges, including how spousal finances are disentangled. In the wake of marriage dissolution, there are tax, alimony, dependency, and child support questions to answer, and these questions may be contentious.
A reputable Houston tax attorney can help people manage their financial and tax position through this process, ensuring they are best positioned for the future.
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