Divorce and Taxes Basics

What You Need to Know About Divorce and Taxes

Alimony and Child Support

Alimony is the payment one spouse pays the other after divorce. Child support is similar, but the payments are made with the benefit of the child in mind. While only alimony was tax-deductible before, as of 2018, the law has changed. At the moment, neither alimony nor child support are tax-deductible. This law applies to all divorce agreements executed after December 31, 2018. 

In other words, payers can no longer request a deduction for their alimony payments. Also, recipients don't have to report it as part of their gross income anymore.

Filing Status

Your filing status can significantly impact your federal income taxes. No matter if you were filing separately or jointly with your spouse, you'll need to abandon your "married" status in case you get a divorce. Then, your options will be either "single" or "head of household". 

Filing as "head of household" has numerous advantages over the "single" status:

• Lower tax rates
• Tax credit eligibility
• Higher standard tax deductions

However, acquiring this status is also more difficult and has more strict requirements. For instance, you are only eligible if you have covered at least half of the household costs. In addition, you need to have a dependent that has been living with you for at least six months, i.e. a child or parent. 

Given that the child spends more time with them, only the custodial parent is qualified for the "head of household" status. And in the case of shared custody, the parent with the higher gross income usually gets the status. 

Property Division

After separation, you and your ex-spouse will also need to figure out what to do with your home. If you decide to sell it, it's best to do so while you still have the "married filing jointly" (MFJ) status. That way, you will get much lower capital gain taxes, which would be sky-high if you sold your home at a profit. Of course, there are other requirements that you need to fulfill, such as living in the house for at least two years before selling, and others. 

If you don't take advantage of the MFJ status on time and sell the house after you've divorced, you won't be able to exclude as much in capital gains, which means you'll end up paying more. 

Legal Fees

Hiring a divorce lawyer is costly but inevitable in most divorce cases. Unfortunately, fees involved with legal and financial counseling are not tax-deductible. Up until 2017, you could get a deduction for fees relating to business income.

However, the Tax Cuts and Jobs Act has suspended this option until 2026. Therefore, unless you have reason to believe your spouse is deliberately attempting to increase them, don't expect to receive any reductions for your legal fees.