Newly Separated or Divorced? Be Aware of Tax Implications

Tax and reporting considerations for separated or divorced persons

Marital separation or divorce is often an emotionally charged experience. Focusing on tax matters may not be high on your priority list. However, it is important to understand the significant tax implications of separation and divorce, particularly if children are involved. The following is an overview of IRS tax rules and reporting requirements to help you avoid mistakes.

• Update your tax withholding form

When you and your spouse separate or divorce, you will likely need to update your new tax withholding by completing a revised Form W-4, Employee’s Withholding Certificate with your employer. If you receive alimony, you may have to make estimated tax payments. You can determine if you’re withholding the correct amount with the Tax Withholding Estimator on IRS.gov.

• Alimony and separate maintenance payments

Alimony

Alimony is the financial support to a spouse after divorce or legal separation. The amount of alimony is dependent on the length of the marriage and is typically made by the spouse with the higher income. Alimony payments can be made until the following conditions are met and therefore the payments would be terminated unless the ruling sets an expiration date.

• • The paying or receiving spouse dies
  • The receiving spouse marries again
  • The paying spouse can no longer earn any income
  • The receiving spouse makes no effort to independently earn income

Separate maintenance

Separate maintenance is the financial support mandated by the court to be paid to a spouse during legal separation. The amount of separate maintenance is determined by the income and expenses of each party and occurs when the taxpayer and spouse are still legally married but physically separated.

Which payments are not considered alimony or separate maintenance?

It is important to note that not all payments under a separation or divorce instrument (e.g., a divorce decree, a separate maintenance decree, or a written separation agreement) are considered alimony or separate maintenance. Alimony and separate maintenance do not include:

• • Child support
  • Noncash property settlements – whether in a lump-sum or installments
  • Payments that are your spouse’s part of community property income
  • Payments to keep up the payer’s property
  • Use of the payer’s property
  • Voluntary payments

Tax treatment of alimony and separate maintenance

• • Amounts paid to a spouse or a former spouse under a divorce decree, a separate maintenance decree, or a written separation agreement may be alimony or separate maintenance for federal tax purposes.
  • Not all alimony or separate maintenance payments are deductible. The divorce or separation agreement must have been executed prior to January 1, 2019, to be deductible on the tax return of the payer and be considered taxable income on the tax return of the payee. Payments that are required as a result of the divorce or separation agreement being executed after December 31, 2018, will not be deductible to the payer and is not considered income to the payee.
  • Certain alimony or separate maintenance payments are deductible by the payer spouse, and the recipient spouse must include it in income.

• Tax rules related to dependent children and support

Generally, the parent with custody of a child can claim that child on their tax return. If parents split custody 50/50 and aren’t filing a joint return, they’ll have to decide which parent claims the child. If the parents can’t agree, taxpayers should refer to the tie-breaker rules in Publication 504, Divorced or Separated Individuals. Child support payments are similar to alimony or separate maintenance payments in the sense that they are recurring, however these payments are always non-taxable to the payee and non-deductible for the payer.

Child support is never deductible and isn’t considered income. Additionally, if a divorce or separation instrument provides for alimony and child support and the payer spouse pays less than the total required, the payments apply to child support first. Only the remaining amount is considered alimony.

Since these payments are for the benefit of any children of the taxpayer and spouse, if unpaid, any federal tax refund can be taken by the IRS to satisfy the child support payments.

• Transferring property

In cases of divorce, where a taxpayer transfers property to their spouse or former spouse, there’s usually no recognized gain or loss on the transfer. The transaction may need to be reported on a gift tax return.

• Update your taxpayer filing status

Your tax filing status is determined by your legal status on December 31 of a tax year. A final decree of divorce or legal separation will allow you to file as single or head of household. If the divorce or legal separation has not been finalized, you and your spouse will need to file as married filing jointly or married filing separately. In some cases, a married filing separately status can cause issues to arise regarding itemized deductions. If you itemize your deductions, then your spouse is also required to itemize on their separately filed return and vice versa when taking the standard deduction. The married filing separately status can also potentially limit certain tax credits (i.e. education credits and child/dependent care credits) and in some cases creates a higher tax liability.

• Report a name change

If you changed your name back to your name before you were married, you must notify the Social Security Administration (SSA) as soon as possible. Failure to do so can cause delays in the filing of your return because when you e-file your return, the name reported on your tax return must match both the SSA and IRS records, resulting in a return rejection by the IRS and the requirement to subsequently paper file the return. Having to paper file your return could delay any tax refunds.

Learn more about tax requirements for separated and divorced taxpayers on the IRS website.

Questions regarding separation or divorce tax and reporting matters specific to your situation? Contact your Keiter Opportunity Advisor.