Taxes affect every aspect of our lives, including divorce. Whether you can file a tax return together, your filing status, whether you can deduct alimony payments, tax consequences of property transfers and a host of other issues are determined by your divorce judgment or orders and the tax code. And the tax law changed in critical ways with the 2018 Tax Cuts and Jobs Act. Accordingly, it is critical to understand how these changes to our tax law may affect your divorce.
Alimony and Taxes
How has the tax law change regarding maintenance (alimony) in 2019?
Tax law around the nation have changed dramatically in 2019. For all divorces and written separation agreements since year end 2018, spousal support is no longer deductible for the party paying it. Nor does the recipient have to include maintenance (alimony) in her (or his) income for divorce entered on or after that date. This is an over-simplification of this critical change in the law. It significantly impacts any divorce, especially including Illinois divorces cases because of the Illinois maintenance guidelines.
I pay maintenance payments to my former spouse. May I deduct the maintenance?
It depends. IF your divorce was entered before January 1, 2019, generally the payor deducts maintenance (alimony). And for these divorces, payments are included in the income of the person receiving them. To be able to deduct the maintenance payments for the payor, there were several requirements. This included:
- The payment must be in cash, or its equivalent, such as a check;
- The payment must be required under a divorce or written separation agreement;
- The maintenance must terminate upon the death of the payee.
- Payments that are ordinarily deductible are not deductible if the divorce decree specifically states that the payments are not alimony/maintenance and/or non-deductible.
For divorces entered after 2018, no longer can the payor deduct maintenance. Yet maintenance remains deductible–even if modified–as long as the underlying divorce or written separation agreement predated January 1, 2019.
Submission of Joint Tax Returns
I am currently in divorce proceedings. Can I file jointly with my spouse?
Yes. If a final judgment of divorce has not been entered by December 31, you are considered married and may file a joint return.
Can we, for the year in which we are divorced, file a joint return?
No. You must be married on the last day of the year (December 31) to file a joint return. You can go through with the divorce hearing before December 31, but wait to finalize the divorce (entry of the final judgment) until January. In such a case you can file a joint return for the previous year.
We have an income tax refund on account of last year’s tax returns. Who gets the refund?
If you filed joint returns for the previous year, the income tax refund check should be made out to both of you. The marital settlement agreement or divorce judgment should state how you and your spouse will receive or divide the income tax refund check.
I believe my spouse’s tax return is not honest. Must I file jointly?
No. You are able to file as head of household if you did not live with your spouse for the last six months of the tax year and meet the other head of household requirements. If not, then you may file as married filing separately.
Exemptions and Credits Related to the Children
What is a personal exemption and how has the tax law changed?
A personal exemption is a deduction reducing taxable income. Through to 2017, you could claim one exemption for each dependent you claim. But through to 2025 no longer are dependent exemptions a deduction on tax returns. On the other hand, this ties in with the child tax credit discussed below. The law in this regard is still complex and advice of a lawyer is critical to protect your rights.
I am divorced and the “custodial” parent. The divorce judgment does not address who can claim the children as exemptions. Can I claim the child tax credit?
Yes. Under current tax law from 2018 through 2025, no longer is there any value to the exemption itself. But the value of the child tax credit has increased from $1,000 per child to $2,000 per child. And for the year 2021, it was increased in value to $3,000 per child (age 6 to 17). the generally. Its allocation “follows” the allocation of the children as dependent exemptions.
Can I still claim the child tax credit if I signed IRS Form 8332, waving the exemption?
Probably not. IRS Form 8332 is a statement by the primary residential parent releasing the exemption—and likely with it the child tax credit. If the primary residential parent signs Form 8332, then only the non residential parent should be able to claim the child tax credit.
Can I claim the tax credit if the marital settlement agreement or the divorce judgment gives the exemption to my spouse?
Yes and no. The party given the exemption in the marital settlement agreement, or the divorce judgment, is entitled to the exemption and you may be held in contempt of court if you claim the exemption. However, as far as the IRS is concerned, if the custodial parent has not executed a Form 8332, he or she has been entitled to the exemption.
What is the child tax credit?
The child tax credit is a $2,000 credit against the tax owed. And starting in 2021 it is fully refundable. It is available to parents with children either under 17 or under age 18. It is anticipated in 2022 forward the credit might include an additional year.
As the custodial parent, what other tax credits might I qualify?
The primary residential parent is the only parent who can claim the child and dependent care credit. This is true regardless of which parent claims the tax exemption for the child. This credit is available if your child is under 13 and you pay child care expenses in order to work or seek work.
What tax consequences arise when property is distributed by a divorce judgment?
The general rule is that no gain or loss is recognized at the time of the transfer when property is transferred to a former spouse, so long as the transfer is incident to divorce. In order to be incident to divorce, the transfer must occur within one year after the divorce judgment is entered and the transfer must be included in the divorce judgment.
Are distributions from a pension plan taxable?
Yes, but the tax may be avoided by a rollover to an eligible retirement plan. In many divorces one spouse’s retirement plan is one of the most valuable assets in the marriage, and the other spouse may be awarded part of the retirement plan.
There are several options the recipient of a part of a retirement plan can exercise.
- The first option should be avoided if at all possible and involves a cash out the distributive interest in the retirement plan. A cash out means you will pay income tax on the entire amount of the distribution plus a 10% early withdrawal penalty.
- The second option, under which you pay no tax or penalty, is to cash out your interest in the retirement plan, then roll it over into another eligible retirement plan, such as an IRA: The rollover must take place within 60 days for the distribution to be tax-free.
- The third option is to take your interest in the form of a Qualified Domestic Relations Orders (QDRO). Under a QDRO, the pension plan administrator must carve out for you your interest in your spouse’s pension plan, and you will have the same rights in regard to the pension plan as does your spouse. The rollover into another qualified plan is tax free. See the Gitlin Law Firm’s Q&A regarding Retirement Plans and Divorce. There is generally a one-time right to avoid the early withdrawal penalty and take a cash distribution (that will be subject to regular income taxes).
We may have to sell the marital residence as part of the divorce settlement. Is the gain from that sale taxable?
Yes. However, gain from the sale of a property is excluded from income if it was owned and used as the taxpayer’s primary home for two of the last five years. (This is known as the use and ownership test). This exclusion is limited to $250,000, or $500,000 in the case of a joint return. On a joint return, the taxpayers can exclude the full amount as long as one spouse meets the ownership requirement and both spouses meet the two year use requirement.
To meet these requirements, the taxpayer will be treated as using the property as a primary residence during any period that their spouse or former spouse is granted use by a divorce or separation agreement. See the IRS discussion of this topic that explains things well.
Where else can I go to find answers to my tax questions?
The IRS has a website at www.IRS.gov. Publication 504 provides additional guidance for divorced or separated individuals.
The income tax consequences of a divorce, especially one involving substantial income and/or substantial assets, are legally complex. You should receive advice from a lawyer who is divorce-income tax knowledgeable, or an accountant.
Updated: June 2021