Divorce has many financial consequences, including big changes to your tax situation. Not only will your tax return change, but your property settlement and alimony also have important tax consequences.
Property Division
The tax code allows most transfers incident to divorce to occur tax-free. This break lets you divide up your marital property without having to pay taxes on any property you transfer to your spouse.
However, there may be tax consequences to transferring some assets. If you receive a portion of your ex-spouse’s retirement account using a qualified domestic relations order, you may need to pay taxes on your withdrawals.
Alimony
As part of the Tax Cuts and Jobs Act (TCJA), the deduction for alimony payments has been eliminated. The spouse who pays alimony will now include the amounts in their gross income, and the recipient won’t need to claim alimony payments as income.
There is an exception for separation agreements that were finalized on or before December 31, 2018. Those taxpayers are grandfathered-in to treatment under the prior law unless they modify their agreements to be treated under the TCJA.
Tax Returns
Your tax return will change in the following ways after a divorce:
- Your filing status will change to either single or head of household.
- You’ll receive a smaller standard deduction.
- The income thresholds for each tax bracket will decrease.
You should review your tax withholdings on form W-4 or modify your estimated tax payments to account for these and other changes.
Tax Debt
Tax debt accumulated during your marriage will continue to be the responsibility of both spouses. The IRS can come after the assets or wages of you or your former spouse to collect your back taxes, penalties, and interest.
Because divorce often causes financial difficulties, you may need some extra time to pay off your tax debt. Innocent spouse relief may be an option, but you should also explore other tax resolution strategies.
Currently not collectible status, installment agreements, or an Offer in Compromise can all be used to resolve your tax problems. Consult with a tax attorney to find the best option for your situation.
The Gartzman Law Firm can help you get tax debt relief after a divorce. Use our contact form to request a consultation with an Atlanta tax resolution attorney.