Last updated on October 19th, 2020
Couples who intend to divorce will have to approach their tax planning in an entirely different way. Whether you have already dissolved the marriage or plan on doing so, here is what to expect for the tax implications.
Transfer of Marital Home
If one individual is transferring property to the ex-spouse, it is treated as a gift – and the transaction may need to be reported on a gift tax return. The person receiving the property won’t be taxed, but whoever sells it will incur taxes.
This is when the valuable federal home sale gain exclusion comes into play. You’ll want to look at the potential capital gains on the house. If the person has owned and lived in the house for at least two years during the five-year period leading up to the date of sale, he or she may be able to exclude up to $250,000 in gains. The $250,000 exclusion is for each owner of the house.
Alimony and Child Support
If one partner is receiving alimony from the other, the alimony is tax-deductible to the payer and taxable to the recipient. One spouse may opt to pay the lower-income spouse’s mortgage payments, which may qualify as alimony under IRS guidelines. However, the written settlement agreement should delineate which payments are considered alimony.
Child support, on the other hand, is not taxable to either the payor or the recipient – which often makes it a more attractive option for the recipient.
Filing Status Matters
When it comes time to file your taxes, pay special attention to the filing status. You may choose to file as head of household if you and your spouse have separated, your spouse did not live in the home for the last six months of the year, and you pay more than 50% of the household maintenance expenses. The household should also be the principal home of a qualifying person or child, for whom you can claim an exemption. If you qualify, you will enjoy lower tax rates.
If you file while you are still married, but perhaps living in separate homes, you may choose the Married Filing Separately status. However, you will pay a higher tax rate than someone filing as a Head of Household. Generally, Married Filing Separately and Single taxpayers have the highest tax rates.
Dependents
The dependent exemption is available to the parent the child lives with for the greater number of nights during the year. The noncustodial parent cannot claim the exemption.
Avoid any unpleasant post-divorce surprises by consulting with a professional. Our team of highly qualified tax advisors can answer your questions and discuss the best path forward for you and your family.