When spouses divorce, their priorities are normally determining who has custody of any children, child support, spousal support, and the division of the marital assets. In many divorces, the tax consequences are an afterthought. The tax consequences can amount to a lot of money, however, especially if children are young and the spousal support award will continue for a long time.
At the Law Office of James A. Graham, we understand the federal and state tax consequences that affect how much you and your children receive in a divorce and how much you might have to pay. We address the tax issues from the start because once the divorce decree is entered and the marital issues are resolved, there’s no do-over. The IRS has its rules that must be obeyed.
Filing a joint return
According to Smart Asset, the timing of your divorce decree affects your ability to file a joint return with your spouse. Generally, you must be married for the full year in order to file a joint return. If your divorce is completed on December 30, 2023, for example, you and your spouse will need to file separate returns for 2023.
If you cannot file jointly, you may be able to file as a “head of household” if you meet the following requirements:
- You were “unmarried” on the last day of the tax year
- You “paid more than half of the costs of keeping up a home for the year. That could include real estate taxes, home insurance, repairs, utilities, and food eaten in the home.”
- You lived with a “qualifying dependent” for more than half of the year. A child is normally a qualifying dependent.
You and your spouse will also need to complete a W-4, which tells your employer how much money to withhold for taxes. The amount may need to be adjusted if you are considered single.
Spousal support and taxes
Whether you or your spouse must report spousal support payments as income, or are eligible to deduct support payments, also depends on the date of your divorce. Generally, the spouse who receives support after a divorce must report it as income. That’s one reason it may be advantageous to negotiate a higher share of the marital property in lieu of reduced payments. If you receive spousal support, that may also affect with IRS forms you need to file.
Child support and taxes
Child support is different as far as the IRS is concerned. Unlike spousal support, child support payments are not reported as income. A parent cannot deduct any child support payments they make.
Generally, the custodial parent can claim their child as a dependent for tax purposes. The custodial parent is the parent that the child lives with for the majority of the year. Normally, the divorce decree or agreement should designate which parent is the custodial parent. Per Smart Asset:
If you are the custodial parent, you are eligible to claim the child as a dependent. That means you have the potential to claim the earned income tax credit (EITC), as well as the child and dependent care credit.
If you are not the custodial parent, you are the noncustodial parent for tax purposes. You cannot claim the EITC or the child and dependent care credit. You also cannot file your taxes as a head of household. However, you may be able to claim some credits.
The noncustodial parent may be able to claim their child as a dependent “if the custodial parent signs Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.” A parent who signs Form 8332 cannot then claim their child as a dependent – and they cannot revoke the form until the next tax year.
Currently, there are no exemptions for dependents. Instead, eligible parents receive a higher standard deduction.
The IRS does not allow a deduction for your legal fees due to divorce
The IRS does not allow spouses to deduct the cost of their legal fees to obtain or negotiate a divorce agreement or order, including litigation expenses and tax advice. The IRS also doesn’t allow a deduction of legal expenses – even if the expenses help a spouse generate income, such as spousal support payments or taxable property.
Smart Assets states that “the IRS said that ‘if you have no legal responsibility arising from the divorce settlement or decree to pay your spouse’s legal fees, your payments are gifts and may be subject to the gift tax.’”
Property division tax issues
The division of the marital property may have some tax issues. For example, if you receive the title to the marital home along with the duty to make the mortgage payments; then you itemize your deductions, you may be able to deduct the mortgage payments.
Likewise, if you keep or receive a business, then any income the business generates after the divorce will be taxable, either at the corporate level and/or your federal and state income tax levels. There may also be tax consequences on any pensions or retirement accounts that our New Orleans family lawyers will review with you.
The divorce should make clear how any joint tax refunds will be handled. There may also be federal and state income tax credits that need to be reviewed and will likely depend on which parent is the custodial parent and other factors.
At the Law Office of James A. Graham, we work to secure your financial and emotional security after a divorce. Throughout St. Tammany Parish, Orleans Parish, and surrounding parishes, James is known for his dedication, preparation, planning, and negotiating skills. He’ll help you understand every aspect of your family law claims, including the tax consequences. We work with tax professionals when necessary. To understand your marital rights and what laws apply to your divorce, please call us or fill out our contact form to schedule a consultation with a divorce lawyer in New Orleans.