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Going through a divorce is a complex process that involves many decisions about property division, finances, and providing for dependent children, and it’s common to feel overwhelmed by their scope. It’s essential that the tax implications for all of these decisions get the attention they require. When contemplating divorce and taxes, or legal separation and taxes, both federal and New Jersey tax laws can have a profound impact on a family’s future financial picture.
So it’s important to include the advice of your accountant or tax professional as you work through the divorce process with your family law attorney. As the old saying goes, sometimes, the devil is in the details, so the time to consider the impact of divorce and taxes – or legal separation and taxes – and applicable tax laws, is before the divorce is finalized.
Filing for taxes
Am I entitled to half of the tax return after my divorce? In a standard divorce decree, the typical agreement is for both parties to equally share tax obligations, and both are entitled to half of any tax refund for each year in which you were married.
You are responsible for any tax, interest, and/or penalties due on a jointly filed tax return filed for the period of time in which you were still married. This responsibility applies, even if all the income was earned by the other spouse.
Your filing status depends on whether you were married or unmarried on the last day of the year. The IRS divorce rules and the New Jersey tax code stipulates these guidelines for filing taxes during a divorce, how to file taxes if divorced mid-year, or taxes after divorce:
- If your divorce is finalized by December 31 of the tax year, you will select the filing status Single or Head of Household (see below).
- If you were still married on December 31, you and your spouse can file a joint return. If you file jointly, you both must include all your income, exemptions, deductions, and credits on that return. You can file a joint return even if one of you had no income or deductions.
- You can file a separate return, even if only one of you had income. If you and your spouse file separate returns, you: Will each report only your own income, exemptions, deductions, and credits on your individual return; Both are responsible only for the tax due on your own return.
- If you meet the requirements to file as head of household for federal purposes, you may file as head of household for New Jersey. One of you may be eligible if you meet all of the following requirements: you are unmarried on the last day of the year, you paid more than half of the household expenses, and a dependent lived with you in your home for more than half of the year.
Also keep in mind, regarding divorce and taxes, your tax obligations may affect the timing of finalizing your divorce. Your tax withholdings for most of the year may have been based on the premise that you would be filing a joint return. It may be wise to delay finalizing your divorce until after January 1, to avoid owing a large amount of federal income tax when you file for the previous year.
Tax withholding
Withholding allowances will likely be affected by divorce and taxes or legal separation and taxes. When you become divorced or separated, you will usually have to file new federal and state withholding forms with your employer to claim your proper withholding allowances. If you receive alimony income, you may also have to adjust your withholding or make estimated tax payments.
Exemptions
Exemptions claimed on your tax return are also affected by federal and state rules for divorce and taxes. You may claim a personal exemption for yourself on the tax return. You can only claim an exemption for your spouse if your filing status is married filing jointly. You cannot claim your spouse/ex-spouse as a dependent.
If you are filing taxes after divorce with a child, you may claim an exemption for each dependent child who qualifies as your dependent for federal tax purposes. In general, the parent who has custody more than half of the year may claim each child as an exemption. The other parent may claim the exemption if it is designated in the divorce decree. Parents also can agree to take the exemption in alternate years.
Child support and child tax credits
In addition to agreeing on child custody, divorced parents claiming dependents on taxes will need to come to mutually agreeable terms on how to proceed. Couples need to determine who will claim each child as a dependent for tax deductions. A child can only be claimed on one parent’s tax return, and the tax credit for that child can likewise only apply to that parent.
Federal and state guidelines for divorce and taxes outline rules for child tax credits. Generally, the parent with custody of a child can claim that child on their tax return to file as head of household or claim credits. If parents split custody 50/50 and are not filing a joint return, they have to agree on which parent gets to claim the child, take the credit on alternate years, or in families with more than one child, agree to divide the credits.
Also according to rules for divorce and taxes, if you receive child support, it is not taxable under New Jersey or federal law. Conversely, if you pay child support, those payments are not tax deductible.
Division of property – real estate
Most property transfers between spouses during a divorce in New Jersey are tax-free. However, selling the home at a later date does have some tax implications. For real estate, you will need to pay a capital gains tax on the amount the home has appreciated in value from the time it was first purchased by you and your ex-spouse. However, your family law attorney or tax professional can advise you if you qualify for an exclusion or reduction on the taxable gain.
Property tax deduction/credit – After your divorce, if you both maintain ownership of the property, your ownership is now 50/50. On your tax return, you can only claim 50% of the property taxes due and paid on the home as your property tax deduction. Alternatively, you can claim the $50 property tax credit if that is more beneficial.
Division of property – Retirement accounts and other assets
At the center of any divorce negotiation is the fair and equitable division of assets. If you participate in a retirement plan and get divorced, your ex-spouse may be entitled to a portion of your account balance, according to federal rules for divorce and taxes. Depending on the type of plan and the amount of benefits, the court can issue a Qualified Domestic Relations Order (QDRO), entitling an ex-spouse to immediately access those benefits, or access at some point in the future.
You should also consider changing the beneficiary of your retirement plan after your divorce. Contact your employer or plan administrator to request a change.
If you are receiving payments under a QDRO, you must claim them as income unless you roll them over into a traditional IRA and meet certain conditions.
Alimony
- Alimony Received – If you receive alimony from your spouse or former spouse, it is taxable in the year you receive it. Alimony is not subject to tax withholding, so you may need to increase the tax you pay to New Jersey during the year, or make estimated tax payments, to avoid a penalty.
- Alimony Paid – You can deduct alimony paid to or for a spouse or former spouse under a divorce or separation decree. Voluntary payments made outside a divorce or separation decree are not deductible.
- In either case, payments for child support are not included in the calculations.
Couples who are separated – legal separation and taxes
Are there similar implications for separation and taxes? Couples who are filing taxes when separated but not yet divorced before the end of the year have the option of filing a joint return. If you choose to file jointly, you will receive one income tax refund or one bill for taxes due, depending on your circumstances. You may also file as married filing separately. Your tax professional can help you compare your tax liabilities for both filing options so you can choose the one most beneficial to you. In the year that your divorce becomes final, however, you lose the option to file a joint return.
For questions about divorce and taxes, or legal separation and taxes, it’s wise to get professional advice from an accountant and also from your attorney. A family law attorney can help you minimize any negative effects on your tax obligations that stem from your divorce. Contact us today at DeTorres and DeGeorge to schedule a consultation with one of our attorneys.
