How a Divorce Affects Your Income Tax Filing Status

Divorce changes your life in many ways. When going through a divorce, not enough people pay attention to the tax consequences of different settlement options. While taxes may be the last thing on your mind as you figure out your newly single life, divorce has important tax implications that you shouldn’t ignore. We thought we would highlight some of the key tax issues to consider during and after divorce.

In general…

You need to consider your filing status, the tax implications of property division, what deductions and credits you qualify for, and how child custody and child support factor into the tax equation. Choosing an incorrect filing status can affect your deductions and credits resulting in the IRS levying penalties for wrongful disclosure, even if they’re unintentional.  With so much to consider, it’s best not to try and figure out the tax implications on your own. Instead, it is best to consult with a tax professional to make sure you have all the information you need to get your tax filings right, avoid filing errors, and keep you from paying more than your fair share.

What if I am still married on December 31, 2023?

If you’re still married on December 31, 2023, you are still considered married by the IRS and will have to choose your filing status. In short, your marital status on December 31, 2023 determines your tax filing status options for the entire year.

Your filing options if you are still married on December 31, 2023 are:

  1. Married Filing Jointly 

Your income is combined with your spouse’s income, and your combined allowable expenses are deducted. Filing jointly typically reduces your tax liability more than married filing separately, but you must be legally married on December 31, 2023.

  1. Married Filing Separately

In this scenario, you and your spouse will each file your own income tax return along with individual income, deductions, and credits. In addition to having control over your own income tax return, filing separately allows you to avoid being responsible for your spouse’s tax obligations. However, tax brackets are typically higher for filing under the Married Filing Separately status than they are for Married Filing Jointly status, so you may pay more in taxes. Again, you must be married on December 31, 2023 to use this filing status.

  1. Single

You can file as single only if your Judgment of Dissolution of Marriage is signed by the Judge and entered by the Court by December 31, 2023. You will have higher tax rates and lower standard deductions than filing Married Filing Jointly or Head of Household (as described below). 

  1. Head of Household

You should discuss this filing status with your CPA as it is very technical. In general, you must be divorced to claim Head of Household status. However, if you are separated but not yet divorced, you may be able to file as Head of Household status if you meet all of the following requirements: (a) Your spouse didn’t live in the same house as you from June 1, 2023 through December 31, 2023; (b) You paid more than 50% of the cost of maintaining your house for the year; and (c) Your house was the main place of residence for your dependent child(ren) for more than 50% of 2023. Filing as Head of Household status can provide you with lower tax rates and higher standard deductions than filing Married Filing Separately or Single.

Is Maintenance taxable?

Maintenance (i.e., spousal support), which is called alimony in other states, is a payment made by one spouse to the other pursuant to a Judgment of Dissolution of Marriage, Judgment of Legal Separation, or Judgment Pendente Lite (i.e., temporary order while a divorce is pending). As of December 31, 2018, maintenance payments are no longer tax deductible by the payor, and they aren’t required to be reported as taxable income by the recipient. However, if you were divorced before December 31, 2018, and maintenance was ordered, the payor spouse is eligible for a tax deduction for their payments and the recipient spouse must record the payments as income on their tax return.

Who claims the child as a dependent?

Child support payments are not tax-deductible to the payor and the recipient does not report those payments as income on his or her income tax returns. Your Parenting Plan should state which parent can claim a child as a dependent in odd-numbered years and even-numbered years. If it doesn’t, the presumption in Missouri is that the recipient of child support has the right to claim a child as a dependent each year on his or her income tax returns. If you are not divorced and filing separately, the IRS guidelines state that whichever parent the child resides with for more time (i.e., over 50%) during the calendar year can claim the child. However, that too can be overcome if the parent the child resides with for more time (i.e., over 50%) during the calendar year signs a written declaration releasing the claim for the child, then the other parent can claim that child as a dependent on his or her income tax returns.

What if I received the marital home in the divorce?

In the case of a transfer of the marital home from one spouse to the other after a divorce, the recipient does not have to pay any tax on the transfer. However, if the recipient then sells the marital home, capital gains tax could apply to the appreciation before and after the transfer of the property.

What if I received a portion of my spouse’s retirement account?

If you were awarded a transfer of one or more retirement accounts in your divorce, a Qualified Domestic Relations Order (QDRO) will be sent to the other spouse’s employer setting forth how the retirement account will be divided. This process is completed after the divorce is finalized as part of the property division. Usually, IRA transfers do not require a QDRO. Instead, an IRA transfer usually is completed by a trustee-to-trustee transfer completed by the financial institution where the IRA is held. If you need to cash out some of the retirement you are awarded, you may incur an early withdrawal penalty if you are not 59 ½ years of age or older and you will have to pay federal taxes on the distribution.

Should you need the assistance of an experienced divorce attorney in Creve Coeur and O’Fallon or have questions about your divorce situation, know that we are here to help and ready to discuss those questions with you.

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