Posted in Firm News
Nobody thinks about taxes when they’re going through a divorce. You’re dealing with custody schedules, figuring out who gets the house, and trying to navigate all the emotional chaos. Taxes feel like something you can worry about later.
But I’m going to be honest with you. The tax consequences of how you structure your divorce settlement can cost you tens of thousands of dollars if you’re not careful. At Fait & DiLima, LLP, we make sure our clients understand these implications before they sign anything.
Property Transfers Between Spouses
There’s actually some good news here. When you transfer property between spouses as part of a divorce, there’s no immediate tax hit. The IRS considers these “incidents of divorce,” which means they won’t tax you on the transfer itself.
Sounds great, right?
Well, sort of. The person receiving the asset also inherits the tax basis. Your spouse bought some stock years ago for $10,000. Today it’s worth $50,000. You get that stock in the divorce settlement, and a year later, you sell it. You owe capital gains tax on $40,000, not just whatever it gained while you owned it.
This matters when you’re dividing assets. Your retirement account might have the same dollar value as your spouse’s investment portfolio, but the after-tax value could be completely different.
Capital Gains And The Marital Home
If you’re married and filing jointly, you can exclude up to $500,000 in capital gains from selling your primary residence. Single filers only get $250,000.
Timing changes everything. Sell before the divorce is final and file jointly? You get the full $500,000 exclusion. Wait until after the divorce is done, and you’re each limited to $250,000. For a house in Bethesda that you bought fifteen years ago, that could mean a six-figure difference in your tax bill.
A Bethesda divorce lawyer can help you analyze what assets are actually worth after taxes so you’re not getting the short end of the stick.
Dependency Exemptions And Child Tax Credits
Only one parent can claim a child as a dependent in any given year. The IRS defaults to the custodial parent, but you can agree to do it differently. Maybe you alternate years. Maybe one parent always claims one child, and the other parent claims the other.
But you need to put it in writing in your divorce agreement. I’ve seen too many former couples end up back in court because they can’t agree who gets to claim the kids, or worse, they both claim the same child, and now they’ve got IRS problems on top of everything else.
Alimony And Spousal Support Changes
For divorces finalized after December 31, 2018, alimony isn’t tax-deductible anymore for the person paying it. And the person receiving it doesn’t pay taxes on it either. If you got divorced before 2019, the old rules still apply.
Why does this matter? Because it fundamentally changes the economics of spousal support. Without the tax deduction, paying alimony costs the payor significantly more. Some people need to restructure their entire settlement to account for this.
Retirement Account Considerations
Splitting retirement accounts requires special paperwork. For most 401(k)s, you need what’s called a Qualified Domestic Relations Order. Done right, the spouse receiving funds can roll them into their own account tax-free.
But if you just take money out of your own IRA to pay your spouse as part of the settlement? You’re going to owe taxes and potentially a 10% penalty on that withdrawal.
Filing Status And Timing
Your marital status on December 31 determines your filing status for the entire tax year. Divorce final by year’s end? You’re filing as single or head of household. Still married on December 31? You’re filing as married, either jointly or separately.
Filing separately while married usually costs you more in taxes. But sometimes it’s necessary when you don’t trust your spouse to report their income accurately, or they owe back taxes.
Planning Makes A Difference
The decisions you make right now about how to divide property, how to structure support payments, and when to finalize your divorce all have tax consequences that will affect you for years.
If you’re going through a divorce and you want to understand how these tax issues apply to your specific situation, let’s talk. A Bethesda divorce lawyer can help structure your settlement in a way that makes financial sense, not just legal sense.
