August 29, 2023

The Tax Implications of Divorce: Five Key Things to Consider

By Heather L. Santonino, Partner, Tax & Business Services

The Tax Implications of Divorce: Five Key Things to Consider Marital Dissolution

Divorce is an extremely stressful time, and couples may be eager to finalize the divorce to move on with their lives. Moving too quickly and not considering important tax implications could be very costly in the long run. Below are some key tax issues that should not be overlooked.

1. Filing status and dependents

Special consideration should be taken when determining the filing status and claiming of dependents. If your divorce is finalized before 12/31, you can no longer file jointly for that year. There could be significant tax savings filing jointly depending on the facts and circumstances. It is important to note that both spouses are responsible for the tax, interest, and penalties when filing jointly.

2. Transfers for Assets/Property

Generally, there are no tax consequences for transferring assets between spouses. There are exceptions and specific rules on the timing of the transfers for them to be nontaxable. Most transfers qualify if they are made within one year after the divorce or even up to six years after the divorce is finalized if the transfer is pursuant to the divorce agreement.

3. Alimony

The 2017 Tax Cuts and Jobs Act changed the treatment of alimony. For divorces finalized after December 31, 2018, alimony paid is no longer deductible to the payor and is not taxable to the recipient.

4. Retirement Accounts

A QDRO (Qualified Domestic Relations Order) is required when a spouse transfers part of their qualified retirement/pension plan as part of the divorce agreement. The receiving spouse can roll-over the funds to their plan tax-free. When it comes to IRAs, the timing of the transfer is critical to ensure it is tax-free.

5. Marital residence

In the last edition of the Matrimonial Insider, we covered the tax considerations of selling the marital home. Proper planning can reduce taxes due to the capital gain if ownership and use tests are met to qualify for the exclusion. Understanding the exclusion qualifications is critical to ensure the proper language is included in the divorce agreement.

The above list highlights some of the tax considerations but definitely not all. Tax rules are complex, so special care should be taken throughout the divorce process to ensure proper planning and documentation. Please consult your Marcum Advisor to assist with any questions.