Navigating Taxes During Separation and Divorce

Tax season can be stressful under the best of circumstances, but if you’re legally separated, newly divorced, or in the process of divorce, navigating tax obligations can become even more complicated. Understanding your filing options, potential tax liabilities, and available relief programs can help ensure compliance and minimizing financial strain.

Filing Status: What Are Your Options?

One of the first tax-related decisions you must make is selecting your filing status. Your marital status on December 31 of the tax year determines how you must file.

1. Married Filing Jointly: If you are still legally married at year-end, you and your spouse may choose to file jointly, potentially benefiting from tax deductions and credits.

2. Married Filing Separately: This may be necessary if you want to separate financial responsibilities or limit liability for your spouse’s tax issues.

3. Head of Household: If you are legally separated, pay more than half the cost of maintaining a home for a dependent, and meet IRS requirements, you may qualify for this status, which often provides greater tax benefits.

4. Single: If your divorce is finalized before December 31, you must file as single (or head of household, if applicable).

Key Tax Considerations for Divorcing Couples

1. Spousal Maintenance (Alimony) and Child Support – Under the Tax Cuts and Jobs Act
   (TCJA), spousal maintenance payments are no longer deductible for the payer nor considered taxable income for the recipient for divorces finalized after December 31, 2018. Child support remains non-deductible and non-taxable.

2. Dependency Exemptions and Child-Related Credits – The parent with primary custody
   typically claims the child as a dependent. However, couples can agree to alternate years or allow the non-custodial parent to claim certain tax benefits with proper documentation.

3. Division of Assets and Capital Gains Taxes – Transfers of assets due to divorce are generally
   not taxable at the time of transfer. However, selling assets such as real estate or investments could trigger capital gains taxes.

4. Retirement Accounts and QDROs – If dividing retirement accounts, using a Qualified
   Domestic Relations Order (QDRO) is essential to avoid penalties and tax consequences.

Innocent Spouse Relief: Protecting Yourself From Liability

If you filed a joint return with your spouse and later discover that they misreported income or
claimed improper deductions, you could be held liable for their mistakes. Fortunately, the IRS offers Innocent Spouse Relief, which may protect you from responsibility for your spouse’s tax liabilities if:

• You filed a joint return without knowledge of errors.

• You can prove that it would be unfair to hold you responsible.

• You meet the eligibility criteria set by the IRS.

This relief is not automatic and requires submitting IRS Form 8857, along with supporting evidence. If you suspect tax issues with a former or soon-to-be ex-spouse, consult a legal or tax professional to explore your options.

Seek Professional Guidance

Divorce and tax laws are complex and ever-changing. Consulting with a knowledgeable family law attorney and a tax professional can help you navigate these challenges, avoid costly mistakes, and ensure financial stability moving forward. If you have questions about tax-related issues during your separation or divorce, contact our office to discuss your unique situation.