A divorce can be emotionally and financially complex. The decisions you make during this time can have long-lasting ramifications, especially for your taxes. Understanding the tax implications of divorce is crucial for effectively managing your budget and planning for retirement. Here’s what you need to know about how divorce can affect your tax situation.

Determine Your Filing Status

Your marital status as of Dec. 31 of the tax year significantly impacts how you file your taxes.

• Divorced by Dec. 31: The IRS considers you unmarried for the entire year if your divorce becomes final on or before the last day of the year. You will need to file as “single” or “head of household” if you meet specific criteria involving dependents.
• Still married on Dec. 31: You generally have two options if you are still legally married at the end of the year, even if you and your spouse have separated.
  • Married filing jointly: This status may yield a higher standard deduction and allows you to claim various tax credits. However, both partners are liable for the tax return.
  • Married filing separately: This status might protect you from potential tax liabilities caused by your spouse’s mistakes or omissions, but often results in a higher tax rate and the loss of some credits.

Tax Implications of Alimony and Child Support

Recent changes in tax law have altered how alimony and child support impact taxes.

• Alimony: For divorce agreements finalized after Dec. 31, 2018, alimony payments are no longer deductible by the payer, nor are they taxable income to the receiver. This change does not apply to divorces and agreements finalized before 2019, which are still subject to the previous rule where alimony is deductible by the payer and taxable to the recipient.
• Child support: Child support is not deductible by the payer and is not taxable to the recipient.

Division of Assets and Retirement Plans

Generally, assets you acquired during the marriage, including your retirement savings, are marital property and subject to division. Splitting your 401(k), IRA or pension with your ex-spouse can have considerable tax implications. A qualified domestic relations order allows you to transfer money from your retirement account to your former spouse’s retirement account without penalties. Additionally, you might need to update beneficiaries on your accounts and consider of asset transfers.

The Benefits of Consulting a Financial Advisor

Given the complexities of tax rules and the potential financial pitfalls after a divorce, consulting with a financial advisor can be invaluable. A tax professional can help you understand the immediate and long-term tax consequences of your divorce settlement and restructure your financial plans, keeping you on track to meet your post-divorce retirement and savings goals.

When you work with Clear View Business Solutions, you get access to two CPAs and certified tax coaches who stay abreast of the tax code so you don’t have to. Our team can develop personalized strategies to minimize your tax liability in the years following your divorce.

Divorce can be disruptive, and the decisions you make can impact your finances for years. Partner with professionals who can provide the guidance you need to come to terms with your new financial reality. Clear View Business Solutions specializes in helping our clients manage the monetary complexities that arise during and after divorce. Contact us today to ensure your post-divorce financial goals are realistic and achievable.