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Understanding Tax Implications of Divorce: What You Should Know

Divorce not only brings emotional turmoil but can also have significant tax implications. From filing status to deciphering tax deductions, understanding the financial aftermath of divorce is crucial to ensure both parties remain compliant with the tax code and make informed decisions.

1. Joint vs. Separate Returns
Upon marriage, many couples opt to file joint tax returns due to the potential tax benefits. However, post-divorce, you’ll need to shift to filing as a single taxpayer or, if you qualify, as a head of household.
When deciding on filing jointly or separately in the year leading up to your divorce, weigh the pros and cons. While joint returns often lead to tax savings, both spouses become jointly and severally liable for any taxes owed — and this includes any additional taxes, interest, or penalties that arise from an audit.

2. The Innocent Spouse Doctrine
The concept of joint and several liabilities means that if a couple files jointly, the IRS can come after either partner for the full owed amount, regardless of who earned the income or claimed wrongful deductions. This might seem unfair, especially if one spouse was unaware of the other’s financial misdeeds.
This is where the “Innocent Spouse Doctrine” comes into play. This relief provides an avenue for spouses or former spouses to be freed from responsibility for additional tax, interest, and penalties if their partner understated or underpaid taxes on a joint return. To qualify, one needs to prove that they didn’t know, and had no reason to know, about the understatement of tax when signing the joint return.

3. Child Tax Deductions
One of the complex challenges divorced parents face is determining who claims child-related deductions and credits. The IRS typically considers the parent with whom the child lives for a majority of the year as the custodial parent. This parent generally claims the child as a dependent.
However, this can be altered if both parents agree. The non-custodial parent can claim the child if the custodial parent signs a written declaration (using Form 8332) that they won’t claim the child as a dependent that year. This form must be attached to the non-custodial parent’s tax return.

4. Dividing Assets and Tax Implications
The division of property during divorce is generally not taxable to either party. However, it’s essential to consider the tax basis of assets. For instance, if one spouse gets the marital home and the other receives investment assets of similar value, future tax implications can vary widely based on selling the assets.

5. Alimony and Tax
Prior to the Tax Cuts and Jobs Act (TCJA) of 2017, alimony was deductible by the payer and taxable income for the recipient. However, for divorces finalized on or after January 1, 2019, this is no longer the case. Now, alimony isn’t deductible for the payer and isn’t considered taxable income for the recipient. This is essential to remember during divorce settlement negotiations, as it can significantly impact the net amounts received or paid.

Get Planning Help
Divorce introduces several tax challenges that require careful consideration and planning. To ensure that you’re making the best decisions for your financial future, consult with both a family law attorney and a tax professional. They can provide guidance tailored to your unique situation and help you navigate the complex tax landscape post-divorce.

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