When negotiating a divorce settlement, it is important to keep in mind the potential future tax implications. From no longer filing jointly to spousal and child support payments, your attorney can explain how your decree impacts how you file with the IRS.
The attorneys at Samuelson Hause & Samuelson, LLP have a comprehensive understanding of how various divorce agreement scenarios may affect your future taxes post-divorce.
Deductions for Dependents
One of the first considerations is which spouse may use the child deduction on their taxes. A spouse with primary custody of the children is entitled by law to claim all children in their custody. Former couples with joint custody often choose some arrangement where each spouse alternates which year they take the deduction. Sometimes, in cases where there are two children, each spouse takes one deduction. The primary custodian can also waive their right to the deduction as part of the negotiation. A well-written divorce agreement will spell out how this deduction is to be handled.
Deductions for Mortgage Interest/Property Taxes
The deduction of mortgage interest payments and property taxes was a shared burden as a married couple. If one spouse keeps the home, they are then solely entitled to take this deduction. Like any other element in a divorce, the spouse who gives up this tax advantage can use that as leverage for receiving something else in return.
How the house is used during the divorce process can also make a difference. If one person has the sole responsibility of making the mortgage payments during the separation period, they would have a right to take that deduction on their individual tax return. For couples who split the costs in the interim, it might make sense for them to also split the benefit. Spouses can also agree to split all mortgage interest and property taxes paid on the home up until its sale.
Prior to the Tax Cuts and Jobs Act of 2017, all alimony was considered taxable income for the person receiving it. The paying spouse also was able to deduct the payments for tax savings. The changes from the 2017 act benefit the receiving spouse because those payments no longer are taxed as income. The paying spouse, on the other hand, can’t deduct the payments like in the past. They cannot deduct the spousal support payments to help them offset those taxes they already paid on the income used to make the payments.
Transfers of Marital Property
Non-liquid retirement and non-retirement investment marital assets are also part of equitable distribution. Depending on the type of account, there could be tax implications and potential penalties. For qualified assets to be transferred without penalty, a Qualified Domestic Relations Order is necessary. A QDRO is a court order issued after a final judgment of divorce that provides the ex-spouse with a share of the benefit upon their former spouse’s retirement.
If either or both spouses need to borrow or take a distribution from an investment account, any penalty or tax liability can be part of negotiating the divorce agreement.
Obtain an Attorney Who Understand Tax Implications
When going through a divorce, your attorney will guide you through possible changes to your tax burden based on different settlement possibilities. Sometimes spouses choose to remain married while they liquidate and split the assets for their divorce so they can file jointly and take advantage of a lower overall tax bracket.
Our dedicated legal professionals can clarify the potential tax pitfalls and the impacts on the marital estate. We have resources that can help even in the most complex circumstances.
If you are considering divorce, talk to one of our attorneys about your situation and goals. We can provide options for a path forward.
The first step is to schedule an initial consultation by calling (516) 584-4685 or by submitting our online form.