Most people think about taxes once a year. But if you’re going through a divorce, or recently finalized one, taxes deserve your attention right now.
Here’s what changes, and what you need to know.
Your filing status changes.
The IRS determines your filing status based on whether you were legally married on December 31st of that year. If your divorce was finalized on December 30th, you file as single, or head of household if you have a qualifying dependent, for that entire year. That shift can meaningfully affect your tax bracket and what you owe.
Alimony rules shifted.
Under current tax law, alimony payments are no longer deductible for the paying spouse, and no longer taxable income for the receiving spouse, for divorces finalized after December 31, 2018. If your settlement was structured under older rules, it’s worth reviewing how those terms still apply to you.
The house comes with tax considerations.
If you kept the family home in the settlement, understand this: when you eventually sell, you may only exclude up to $250,000 in capital gains as a single filer, compared to $500,000 as a married couple. That difference matters if your home has appreciated significantly.
Retirement accounts have their own rules.
Dividing a 401(k) or pension requires a Qualified Domestic Relations Order (QDRO). Without one, you could face unexpected taxes and penalties. Get this right the first time.
Dependents determine who gets key deductions.
Only one parent can claim a child as a dependent in a given year. This affects the Child Tax Credit, education credits, and more. Make sure your settlement agreement addresses this clearly.
Divorce changes more than your household, it changes your entire financial picture. A CDFA® can help you understand the tax implications before and after your settlement, so there are no surprises come April.
This is not tax advice and for informational purposes only.