Divorce can be a complex and emotional process. But it also brings about significant changes in your tax situation. Understanding these changes is crucial to avoid pitfalls and make informed decisions. This blog will guide you through the key aspects of taxes after divorce.
Filing status matters
Your filing status is pivotal. It dictates your filing requirements, standard deduction, and eligibility for specific credits. Here is what you need to know:
- Married on the last day of the year: if you have not legally separated or divorced by December 31, the IRS considers you married.
- Legally separated or divorced: if you have legally separated or divorced by December 31, you might need to file as “Single” or “Head of Household”
- Head of household: you may qualify if your spouse did not live with you for the last six months of the year and you paid more than half the cost of maintaining your home.
Alimony and tax withholding
The tax treatment of alimony has changed. If you signed your divorce agreement in 2019 or later, the payer cannot deduct alimony payments, and the recipient does not include them in their income. For agreements signed before 2019, the payer can deduct alimony, and the recipient must include it as income.
Property transfers and retirement plans
Transfers of property due to divorce usually do not trigger a gain or loss. Yet, you may need to report the transaction on a gift tax return. When it comes to retirement plans, a Qualified Domestic Relations Order (QDRO) may entitle your ex-spouse to a part of your account balance. These payments are taxable unless rolled over into an IRA.
Divorce impacts your tax situation in many ways. Consulting an attorney can help you understand these complex issues and protect your interests throughout the divorce process. An attorney can provide valuable guidance on how to manage financial matters, ensuring that you are making informed decisions that will benefit your financial future post-divorce.