The stress and cost of a divorce can be overwhelming. If you are preparing to go through a divorce, an understanding of the tax consequences of divorce is vital to planning for your financial future.
The tax ramifications of divorce will be largely determined by your filing status. If you are married as of December 31, you may file as “married filing jointly” or “married filing separately” for that tax year. If you file jointly with your spouse or former spouse, you will claim all deductions and credits on your single tax return. If you file separately, however, only one spouse may take the standard deduction, and tax laws will stipulate which deductions and credits each spouse may claim. Filing separately can often lead to a higher total tax bill. If you obtain a final divorce decree before the end of the tax year (December 31), you may file as an “unmarried” individual or a “head of household” if you qualify. An individual filing as a head of household may enjoy a more substantial standard deduction and qualify to use additional tax credits.
A number of deductions and credits may also be affected by a divorce settlement or order. An individual who pays spousal support may deduct spousal support payments if certain IRS requirements are met. The spousal support recipient will be required to pay income taxes on these payments. Child support payments and certain transfers of assets and marital property will not be taxed. For instance, a transfer of an IRA under a divorce instrument is not taxable if it is rolled over properly. However, you may be taxed on the gains or losses from the sale of your primary residence, certain transfers in trust, and certain stock redemptions. If you sell your primary residence, you may be able to exclude up to $250,000 in gains if you file separately, or $500,000 if you file jointly.
The divorce attorneys at the Connecticut law firm of Siegel, Reilly & Kaufman, LLC can guide you through the divorce process and work to minimize your tax bill.