Filing Status 

Let’s look at common tax issues impacted by divorce, starting with how you file taxes. If your divorce is not final by year’s end, you have the option to file jointly or separately as a married couple. Married couples filing jointly report combined income and expenses, which often lowers their taxes compared to filing separately. 

If your spouse has not lived at home for the last six months of the year, you may be able to file as Head of Household (HOH), which offers a higher standard deduction and other tax benefits. 

A drastic change in income due to divorce can also affect your tax bracket and tax rate. Your CDFA clarifies these changes and explores potential options to help improve your tax situation. 

Alimony and Child Support 

Alimony (also known as maintenance or spousal support) is not generally treated as taxable income if the divorce agreement was created after 2019.  Additionally, alimony payments established after 2019 are generally not tax-deductible for the payer. 

Child support payments are not subject to tax and shouldn’t be included in your gross income when filing your tax return. However, the custodial parent can generally claim the children on their taxes if they meet certain criteria. To start, the parent must show they have financially supported the child for at least six months that year, and the child must reside in the primary home for at least half the year as well. 

Assets and Liabilities

Generally, the IRS does not treat the transfer of assets between spouses in a divorce as a taxable event. However, assets that have increased in value since you acquired them during the marriage, such as stocks, bonds, mutual funds, and real estate, are subject to taxes when they are sold.

When you sell these assets, you will be taxed on the capital gains earned from the time they were purchased to the time they are sold. But there are exceptions. If you reinvest the proceeds from the sale of the primary home within a certain time, you may be able to avoid paying capital gains taxes on those profits. 

Like assets, debts incurred during the marriage are generally considered marital property, which is subject to division in divorce. Some “community property” states divide assets and debts equally 50-50, while the majority of states in the U.S. divide them equitably. 

The goal of this process is to arrive at a fair and reasonable settlement for both parties. 

Schedule a Pre-Divorce Financial Analysis Today 

Deciding how to file taxes or if and when to sell your primary residence during a separation are choices that have a big impact on your financial future after divorce. 

The best time to discuss the financial aspects of divorce is well before your agreement is final. For personalized divorce financial planning solutions, find an EP Wealth advisor near you to get started today. 


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