How Will My Divorce Impact My Taxes? PART I

This Week’s Blog by Amanda E. Ell

A divorce proceeding will impact your life in countless ways. Typically, when negotiating a divorce settlement, parties are focused on dividing assets and calculating the correct amount of support. One critical area that experienced divorce attorneys in Westport and Greenwich, such as those at Broder & Orland LLC consider is how a divorce will impact your taxes. Factors such as who will take the children as dependency exemptions and who will be entitled to take the mortgage and real estate tax deductions on the marital residence can easily slip through the cracks. Your divorce will impact your taxes in a number of ways, but three of the more important areas to consider are the following: your filing status, what exemptions and deductions you are entitled to versus those your spouse is entitled to, and the treatment of support payments. Part I of this article will address how a person’s filing status and the exemptions and deductions to which he or she is entitled are affected by divorce.

Filing Status

Your filing status in any given calendar year will depend on your marital status at the end of the year. If you are divorced at any time in a given calendar year, you and your former spouse are precluded from filing as a married couple in that year regardless of when your divorce occurs. This rule does not apply, however, until your divorce is finalized. If, for example, you begin the dissolution process in 2017 but do not obtain a final divorce judgment until May of 2018, you can file as a married filing jointly in 2017, but not in 2018.

Being precluded from filing as a married couple can have a significant financial impact on you and your former spouse. At Broder & Orland LLC, we often tell clients to seek the advice of an accountant with respect to this issue. An accountant can prepare pro forma tax calculations to give you an estimate of the difference in your tax liability if you file as single or head of household versus married filing jointly. Depending on the extent of the difference for filing solely versus jointly, it may make sense to postpone the date of your divorce, if possible, until the following year. Doing so will enable you and your spouse to file as a married couple for an additional year.

Once you and your spouse are divorced and filing separately, you will need to consider whether you qualify for head of household status. Filing as head of household is typically a favorable tax status, however, filing as head of household requires you to be unmarried, pay more than half the cost of keeping up a home for a year, and have a “qualifying person” (such as your child) living in the home with you for more than half of the year. If you are unable to file as head of household, you will file as a single taxpayer after your divorce, unless and until you are remarried and opt to file jointly with your new spouse.

Exemptions & Deductions

The next area to consider is what deductions you and your former spouse will be entitled to after your dissolution. If you have minor children, you likely take a child dependency exemption on your tax returns. As part of your settlement, you and your spouse will need to determine whether you will share the available exemption(s) or whether one party will always be entitled to the exemption(s). You will want to make sure that whatever you decide is supported by the relevant IRS and State of Connecticut tax regulations and is memorialized in your Separation Agreement.

If you and your spouse own a home at the time of your divorce, or you sold a home in the year you are divorcing, you will need to determine who will take the deductions for the mortgage interest and real estate taxes related to the home. Who is entitled to take these deductions can become an important point of negotiation in any well-drafted Separation Agreement. Factors that are considered when negotiating who can take these deductions include who paid the mortgage and real estate taxes during the marriage and during the divorce, who will be paying these expenses after the divorce, and who is keeping the house after the divorce. If the house is being sold as part of the divorce, another point to be negotiated in a settlement is who will be responsible for paying any capital gains tax, if applicable, in the year of the sale.

Part II of this series will discuss a third way that your divorce will impact your tax return: the treatment of support payments paid by one party to the other.