Navigating Taxes During and After Divorce: Essential Tips to Know

Divorce is challenging enough, trying to decide how to divide assets and establish a fair amount of support. The last thing you might want to think about is taxes. But it is equally important to understand the tax implications of your decisions (or indecisions), as they can save you from future headaches and financial strain. Here are some essential tax tips to consider:
 
During your divorce you should consider these practical tips:
Handle Property Transfers Correctly
Transfers of property between spouses as part of the divorce are usually non-taxable events. These types of transfers are generally specified in the Marital Settlement Agreement. However, you must work with your plan provider or real estate attorney to ensure the transfers are handled correctly.
 
Choose the Right Filing Status
Your marital status as of December 31st determines your filing status for the entire year. But, even if you’re entitled to file joint, you should still consider whether filing jointly or separately makes better financial sense. If you’re living separate and apart, you may also want to consider whether you file as head of household (instead of married filed separately).
 
Don't Forget About Retirement Accounts
Dividing retirement accounts can have tax or other financial consequences, if not properly transferred. For example, you may incur penalties if you liquidate a retirement account, instead of having it transferred directly to your spouse by way of a Qualified Domestic Relations Orders (QDROs). Most important is to ensure the language in your Settlement Agreement regarding how these types of assets are to be transferred is specifically articulated, which should include language that confirms the asset is being transferred through a “tax-free rollover”, for example.
 
After your divorce, these essential tax tips are a must:
Update Your Withholding
Change in your marital status usually means a change in the tax withholdings outlined on your paycheck. To ensure you have made the correct election, file a new Form W-4 with your employer to reflect your current situation.
 
Real Property Transfers
Usually the marital home (or other real property) is transferred post-divorce. When transferring real property in New Jersey, you must be aware that there is a ninety (90) day timeframe to complete the conveyance, if you want to be exempt from the realty transfer tax. Meaning, the Deed must be recorded within 90 days of the divorce being final.
 
Understand Alimony Tax Treatment
Alimony and spousal support established after 2018 are not tax-deductible for the payer and are thus not taxable to the recipient.
  
Claiming Dependents
The custodial parent generally has the right to claim the child as a dependent. However, we routinely see parents alternating the dependents or if there are more than one, splitting them. In that event, the parties must agree and must file the appropriate form.

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Please note that these tips are just that, tips and general information. This is not tax advice.  What you should do in your situation, depends on the specific facts of your case. Also, keep in mind, most divorce lawyers (HLG included) are not tax lawyers, so if you are unsure what to do, we encourage you to seek professional advice from a tax expert. Tax laws are complex, and getting professional advice can be invaluable during this transitional period.
 
This blog post published in April 2024 provides a starting point for individuals think about taxes during divorce. Tax laws change overtime, so staying updated is crucial.