Divorce is a major life event with significant emotional and legal implications. However, many people overlook the profound impact it can have on their financial situation, especially when it comes to taxes. Making uninformed decisions during your divorce can lead to costly and unexpected tax liabilities down the road.
Understanding how divorce affects your taxes in Virginia is crucial for protecting your financial future. This guide covers the key tax issues you need to be aware of during and after your divorce.
1. Filing Status: Your First Big Decision
Your marital status on December 31st of a given year determines your filing status for that entire year. This is your first major tax decision.
•Married Filing Jointly/Separately: If you are still legally married on the last day of the year (i.e., your divorce is not final), you can choose to file as “Married Filing Jointly” or “Married Filing Separately.” A joint return usually results in a lower tax liability, but it also means you are both jointly and severally liable for the tax bill—even if your spouse was the one who earned the income.
•Head of Household: If you are considered “unmarried” for tax purposes, you may be able to file as “Head of Household.” This status offers a higher standard deduction and more favorable tax brackets than filing as “Single.” To qualify, you must pay for more than half of the household expenses and have a qualifying child or dependent living with you for more than half the year.
•Single: Once your divorce is final, you will file as “Single” (unless you qualify for Head of Household).
2. Who Claims the Children? The Dependency Exemption
Only one parent can claim a child as a dependent for tax purposes. The dependency exemption allows you to claim valuable tax credits, such as the Child Tax Credit. Generally, the custodial parent—the parent with whom the child lives for the greater number of nights during the year—is the one who gets to claim the child.
However, the custodial parent can release this claim to the non-custodial parent by signing IRS Form 8332, “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.” This is often a point of negotiation in a divorce settlement.
3. The Tax Treatment of Alimony (Spousal Support)
This is one of the most significant tax changes in recent years. The tax law regarding alimony was reversed for divorces finalized after December 31, 2018.
•For Divorces Finalized After 2018: Alimony payments are NOT tax-deductible for the paying spouse and are NOT considered taxable income for the receiving spouse. The payments are treated as a neutral transfer, similar to child support.
It is crucial to factor this into negotiations. Since the paying spouse no longer gets a tax deduction, they may have less disposable income to pay support, which can affect the amount agreed upon.
4. Property Division and the Marital Home
Generally, the transfer of property between spouses as part of a divorce settlement is not a taxable event. You do not have to pay taxes on assets you receive from your spouse in the divorce.
However, the tax implications come into play when you later sell an asset you received. The most common example is the marital home.
When you sell a primary residence, you can typically exclude a significant portion of the capital gains from your taxes. If you sell the home while still married, you can exclude up to $500,000 in gains. If you sell it after the divorce, you can only exclude up to $250,000 as a single individual. The timing of the sale of the marital home is a critical financial decision that should be discussed with your attorney and a financial advisor.
A Tax-Smart Divorce Protects Your Future
The financial consequences of a divorce can last for years. Failing to consider the tax implications during your settlement negotiations can result in an unfair agreement that leaves you with unexpected financial burdens.
At Raheen Family Law, we understand that a good divorce settlement is one that protects you both legally and financially. We work with our clients to address these complex tax issues and ensure their interests are protected. Contact us today to schedule a confidential consultation.