What Impact will Divorce Have on Your Taxes

One of the first things to determine in preparing your income tax return is your filing status. In general, your filing status depends on whether you are considered unmarried or married. A marriage means only a legal union between a man and a woman as husband and wife (at least for now).

Divorced persons. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the entire year.

Divorce and remarriage. If you obtain a divorce in one year for the sole person of filing tax returns as unmarried individuals, and at the time of divorce you intend to and do remarry each other in the following tax year, you must file married individuals.

When to get divorced. If spouses have similar incomes, then December is the better choice. This way, you can file single returns for the whole year. January is the better month to get divorced if one person has substantially more income than the other and you both want to save on taxes.

Other Considerations

• AMT: If you are getting a divorce, you should consider the impact of the alternative minimum tax (AMT) on special types of income. Accelerating these types of income or deferring related deductions may have greater benefits while still filing as married filing jointly. For more incorporation on AMT, please see AMT section of this website.
• Legal Fees: Usually, legal fees involved in a divorce aren't a deductible item unless the fee was for tax advice.
• Who Claims the Children? Special rules apply to divorced and separated parents when claiming exemptions for their children. If, between both of them, they provide more than 50 percent of the support, the exemption generally goes to the custodial parent, that is, the parent who has the child living with them for more than half the year. The custodial parent can release the exemption to the non-custodial parent by filing Form 8332. The custodial parent can release the exemption for one year or for all future years.
• Alimony vs. Child Support: The tax treatments of alimony and child support payments often cause confusion, especially among the recently divorced or those considering taking that step. Generally, alimony you pay is deductible (even if you don't itemize) while alimony you receive is taxable. What's more, alimony you receive is considered earned income for purposes of contributing to an individual retirement arrangement, or IRA. On the other hand, child support payments you make are not deductible, and any such payments you receive are not taxable.
• Property Settlement: When a divorcing couple agrees to a property settlement, there are no immediate tax consequences. But when it comes time to sell the property, one of the parties could be in for a nasty tax surprise. That's because each spouse receives property with its original tax basis, and a low tax basis may trigger a large capital gain down the road. A truly equitable property settlement should consider the tax basis of assets, not just current market value.