If you’re recently divorced or divorcing, taxes might be at the very back of your mind. Yet, they will impact your wallet heavily now more than ever before. As of January 2019, new tax laws were enacted and will impact couples who decide to call it quits.
Under the tax bill, alimony payments will no longer be deductible for payers. If you are a recipient, the alimony also won’t be included in your taxable income. This will only be applicable if your divorce is effective after 31st December 2022.
The recipients of spousal support (alimony) checks are frequently women (but not always). And while having alimony not taxed might appear to be a great idea, it probably will reduce the amount of alimony you will receive.
In other words, due to higher taxation on the payers, who then end up with less net income, the likely result will be less support paid. But that smaller payment is also offset by the fact that it is now tax-free income.
That said, as a woman, you go through many changes in your lifetime. Some of that transition may include being married and then divorcing, adjusting to being single once more, sharing your child custody, and to finding separate living arrangements.
On top of that, you may worry about your future income and how taxes will play out in your new life.
While taxes are not always easy to manage, working with a Certified Divorce Financial Analyst will help you understand how taxes will affect you during your divorce and in your life after the divorce.
What You Need To Know About Taxes After A Divorce
Your Filing Status
Your tax filing status is determined by your marital status on the last day of the year, which is December 31st, and whether or not you are caring for minor children.
As soon as your divorce is settled, your filing status changes to one of two options; you are either
head of household or a single household. What’s the difference between the two? Filing as a single household will result in a higher tax bill than filing as head of household.
You are eligible to file as head of household only if you are:
Maintaining a household for your child. The home will also serve as a primary residence for the family for over half of the tax year.
Contributing more than half of the total amount required to maintain your household.
Be a resident alien or U.S. citizen for the whole tax year.
Living separately from your partner for more than 6 months or remain unmarried until the year ends.
Alimony Payments and Your Taxable Income
For a divorce effective before January 1, 2023, alimony payments are taxable income for the one receiving. They are also deductible for the one paying. The IRS, however, is quite strict about what qualifies for alimony deduction.
For example, if you and your ex-spouse choose to continue sharing a residence even after divorcing, alimony payments made during the cohabitation can’t be deducted. In addition, any deductions on the alimony payments have to be outlined in your divorce agreement or written separation agreement.
Child Support Payment and Your Taxable Income
Wondering whether child support payment is part of the taxable income? It's not. Child support is tax-neutral hence, it doesn’t affect your taxes at all.
Child support payment isn’t part of the taxable income for the parent receiving the support; neither is it tax deductible for the parent whose paying for support.
Are you in a situation where you’ve retained your home but you share the mortgage with your ex-
partner? Then you may be wondering who gets deductions for property taxes and mortgage interest.
Generally, both home ownership and the amount paid for the home mortgage control who gets the deductions and how much gets deducted. Therefore, if you and your ex-spouse are sharing a home mortgage, your tax return deduction should reflect the proportion of expenses you pay.
Should you and your partner decide on joint property ownership and to share the mortgage payments even after your divorce, the deductions should be split in half.
Since property taxes and mortgage interest are some of the most important itemized deductions in minimizing your final tax bill, it’s crucial to correctly account for the payments and understand who is supposed to claim the tax deductions.
Just remember, if you’re still in the divorce negotiation stages, your attorney should include that as part of the settlement agreement.
Estimated and Income Tax Payments
It’s uncommon for your income after divorce to remain the same as your income while you were still married. It’s more likely that your stream of income will change significantly, most likely impacted by probably going back to work, alimony, or receiving child support.
A major implication of these changes is the need to pay estimated tax payments. For example, as opposed to employment income where your taxes are automatically withheld, you might receive alimony with no tax withholding. This means you’ll have to make estimated tax payments based on your alimony income.
Estimated tax payments are usually made at the start of each quarter. It is recommended to enlist the services of a qualified CPA to help you calculate the total amount and to file the necessary paperwork for your estimated payments.
If you have employment income, you’ll have to recalculate your approximated income tax, as well as, consider if your W-4 needs to change. Please note, the tax brackets for joint filers are higher than those for the head of household filers.
Therefore, if you were the main income earner, you may have to withhold extra tax by minimizing the exemptions on your W-4 to steer clear of penalties for underpaid tax estimates.
Claiming Your Child As A Dependent
Another deduction that needs to be addressed in your settlement agreement is which of you is entitled to claim the child (ren) as a dependent. If your divorce settlement doesn’t indicate who is to get the exemption, then it’s the custodial parent who claims the child (or the parent who cares for the child at least 51% of the time).
Oftentimes, this subject is discussed and agreed upon in the negotiation stage. And using IRS Form 8332, the exemption is shared or traded with the noncustodial parent.
Taxes can be tricky, and divorce can make things even more confusing. A Certified Divorce Financial Analyst® can help you look at your options and the potential impact they will have on you financially. Reach out to our team today to help you sort things out now and plan for your financial future.
Take Control of Your Future
When you consider divorce, or if you know someone who is contemplating divorce, one of the biggest realities for those in the divorce process is the financial settlement and financial analysis post-divorce. Get the assistance of Kimberly Surber and Leslie Valant, both Certified Divorce Financial Analyst® at Leeward Divorce Financial Planning.
Both Kimberly and Leslie provide step-by-step guidance on matters related to divorce. With a wide range of experience and expertise related to divorce issues, our team will simplify the process and provide much-needed clarity in areas such as long-term tax consequences, asset, and debt analysis, dividing pension plans, continued health care coverage, stock option elections, protecting support with life insurance, and much more.
This information is not intended to be a substitute for seeking legal advice from an attorney. For legal or tax advice please seek the services of a qualified attorney and/or qualified tax professional.