10 Ways Divorce Will Effect Your Taxes

While most people know that child and spousal support effect taxes, many don’t realize that divorce will effect your taxes in many other ways you never considered.

1. Child Support.  If you pay child support, this amount is not tax deductible. However, if you receive child support, it is not taxable.

2. Make sure your divorce agreement is clear on who claims the children each year. If your divorce judgment is silents on the matter, the custodial parent gets to claim the children.

3. Maintenance (Alimony) .  Maintenance payments are tax deductible only if your divorce agreement or judgment clearly states that the payments are for maintenance. A distribution of assets will not qualify for this deduction.

   Maintenance payments received are taxable for the year you receive it. According to the IRS, “Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty. To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages”. If you will receive a substantial amount of maintenance, you should discuss your options with an accountant before signing an agreement.

4. File separately for the year your divorce is final. Even if you were married part of the year, your marital status at the end of the year determines how you file your tax return.  If your divorce is final on December 31st, you file single for that year.

5. Innocent spouse. When you file a joint tax return, each spouse is jointly and severally liable for 100 percent of the taxes due on the return, penalties, and interest assessed. Even once your divorce is finalized, you will be liable for any joint returns. 

   Divorce is a long process, and in order to protect assets you may decide to continue to file jointly while the divorce is pending.  If you’re going to file a joint return, consider protecting yourself from future liability by including an indemnification clause in your final judgement of divorce. An indemnification clause is a clause that states that one spouse agrees to be responsible for all  future tax liabilities resulting from joint returns. This does not prevent the IRS from collecting from you, but gives you a way to be reimbursed by your spouse if it happens.

6. Legal Fees. You can deduct legal fees related to the divorce in general, but you can deduct legal fees related to collecting alimony. Ask your attorney to bill you separately for that portion of the divorce.

7. Name Changes.  Another thing people often forget is the name change. The name on your tax return must match the name on your Social Security card. Your refund can be delayed if the names don't match.

8. Health Care Considerations  Even If you lose your health insurance coverage due to divorce, you are still required to have coverage for every month of the year or you will have to pay the penalty. Divorce is considered a qualifying life event that allows you to enroll in health coverage through the Health Insurance Marketplace even after the normal enrollment period.

9. Mortgage tax benefit.  The person who stays in the marital residence may be able to claim the mortgage interest deduction. If you are paying the mortgage, but not living in the residence, make sure your final divorce judgement includes that you get this deduction.

10. Property Taxes. Be sure your final judgement includes how property taxes are claimed. Either one party can claim it in its entirety or the parties can split it.

Taxes are an important part of your divorce. Though your divorce attorney may be aware of these issues, you need to seek the advice of a certified accountant. Better yet, give your attorney and accountant authorization to communicate with each other to best aid you in the most financially beneficial divorce settlement.