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What tax implications do you need to keep in mind after divorce?

On Behalf of | Jan 15, 2025 | Divorce

Divorce can bring significant changes to a person’s tax situation. The way you pay taxes may change after divorce, or you might have new tax obligations altogether.

Understanding these changes can help you avoid unexpected issues and plan effectively for the future.

Filing status changes

If your divorce finalizes by December 31, you must file as single or head of household for that tax year. Head of household status may be available if you have a dependent child and meet other requirements. Filing as head of household often provides tax benefits, such as lower tax rates and a higher standard deduction.

Dependents and child tax credits

Deciding which parent claims a child as a dependent is important. Only one parent can claim the child on their tax return. The parent with primary custody typically has the right to claim the child, but parents can agree to transfer this right to the other parent for tax purposes. Claiming a child as a dependent allows eligibility for child tax credits and other tax benefits.

Alimony and child support

Alimony payments, also called spousal maintenance, have specific tax rules. For divorces finalized after December 31, 2018, the person paying alimony cannot deduct it, and the recipient does not report it as taxable income. Child support payments do not have tax implications for either the paying or receiving parent.

Division of property

Transferring property as part of a divorce settlement does not usually trigger immediate tax consequences. However, later sales of the property may result in capital gains taxes. For example, if you sell your home after the divorce, you may face capital gains taxes depending on the property’s value and your filing status.

Retirement account transfers

Dividing retirement accounts requires careful planning to avoid tax penalties. Using a qualified domestic relations order ensures that transfers occur without early withdrawal penalties. Taxes on distributions occur when you access the funds later.

Planning for tax implications after divorce requires carefully familiarizing yourself with these rules. Stay informed about New York tax laws during and after your divorce to avoid costly mistakes and ensure financial stability.