Untangling tax issues after divorce

If you separated from your marital partner or divorced your spouse in 2019, you probably have questions about how this could affect your tax filing. As the first quarter of 2020 arrives, careful planning can help you avoid costly surprises.

Review and prepare for these potential tax issues after divorce.

Laws about spousal support

The Tax Cuts and Jobs Act of 2017 reversed alimony deductions that were in place for seven decades. If you pay spousal support and your agreement was not executed or your divorce not entered before December 31, 2018, you will not be able to deduct alimony or support from your taxes. You will also not be able to deduct alimony or support if the support was not explicitly designated as taxable to the payee and deductible to the payor. If you receive alimony from a former spouse, these payments no longer fall under taxable income according to the new IRS rules.

If you expect to negotiate spousal support as part of an upcoming divorce settlement, these tax laws will likely result in lower alimony payments. Courts may adjust guideline amounts to account for this tax impact on the person paying spousal support.

Updated filing status

When your marriage ends, you must file taxes as either single or head of household. To qualify as a head of household, you must have:

  • Paid half the cost of maintaining the home during the tax year
  • Supported qualifying dependents such as children or disabled parents

And either:

  • Had a finalized divorce or legal separation agreement as of December 31, 2019
  • Have lived separate and apart from your spouse for the last six months

Those who file as a head of household can typically qualify for lower tax rates and certain tax credits. These can include Child and Dependent Care Credit and Child Tax Credit. However, both parents cannot claim this status for the same qualifying dependent. If you are not yet divorced, you should consider negotiating such tax issues in your divorce agreement.

Filing a joint return

If you have separated from your spouse but the divorce is not yet final, you can file a joint return or file as married filing separately for the year. It is usually beneficial from a tax savings standpoint to file jointly.

If you do so, however, you need to be careful as to how the taxes are shared, as well as the cost of any audits, potential interest and penalties. You also need to be cautious of how refunds, if any, are shared. Tax indemnification agreements are common during the period you are negotiating your separation and divorce and will usually cover these issues.