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What Are the Tax Implications of Divorce?



What Are the Tax Implications of Divorce?

Our New Jersey Divorce Lawyers Answer Some of Your Tax Questions.

mfr One of the most difficult aspects of a divorce is the financial challenges it can present, including when it comes to taxes. A common question is: What are the tax implications of divorce? Understandably, many people, like you, who are divorcing want to optimize their tax position and avoid paying too much to Uncle Sam. However, federal and state tax laws are very complex and frequently changing, and it can be difficult to understand how the laws affect your individual divorce. Our divorce lawyers can counsel you on some issues regarding tax issues related to your case and help ensure that you get the most beneficial result for your situation. Of course, since we are not tax experts, it is critical that we work closely with certified public accountants, tax attorneys, tax planning strategists, and other professionals with expertise in the areas of state and federal tax laws to provide you the most comprehensive legal support possible.
When you need help with your divorce, including understanding its tax implications, contact [MFR] Men’s & Fathers’ Rights Divorce Lawyers by Schultz & Associates, LLC to arrange a time to speak with our experienced attorneys. You can reach out to our Hackensack law firm by calling (201) 880-9770. We are committed to excellence in the practice of family law—because family law is all we do.

Our Bergen County Attorneys Protect Interests of Divorcing Spouses

There are many tax implications of divorce that we can counsel you about generally based upon the intricacies of your specific situation. Some common issues that you may have concerns about include the following:
  • How child support does or does not affect you or the other parent’s taxes?
  • Who gets the dependent children exemption following divorce?
  • Do you have to pay Federal and/or State taxes on alimony and, if you are the payor, can alimony be deducted on my Federal and/or State income tax returns?
  • How tax debt is handled in divorce?
We can also address concerns related to possible tax consequences for divorces that occurred years ago, impact family businesses or retirement assets and other areas. Whatever concern you have about taxes and your divorce, you can rely on our knowledgeable Bergen County based attorneys to get you the answers you need. For general information about tax laws, at both the state and federal levels, you can also visit the New Jersey Tax Guide.

Tax Concerns for Divorcing Parents

Who Gets the Child Tax Exemption or Child Care Credit in a Divorce?

If you have dependent children and are divorcing, you may be wondering, who gets the Child tax exemption when parents divorce? What about the Child Care Credit? In general and according to the IRS rules, technically, the custodial parent, who is the parent the child lives with the majority of the time, is eligible for the exemption. However, that rule can change—and often does– in a divorce situation. In your divorce agreement, a lot of times, the parents agree to alternate exemption years with your former spouse. Your attorney may be able to help you negotiate an arrangement that is fair to both you and your spouse when it comes to child tax exemption credits. As for the child care credit, the same philosophy may apply depending on the circumstances and whether the children are in child care and which parent is paying the lion’s share of that service.

Is Child Support Taxable?

People who pay and receive child support often have concerns about the tax implications of divorce on that support. Under both federal law and New Jersey state law, child support is not taxable or deductible on Federal and/or State income tax returns. In other words, if you receive child support, you do not have to claim it as income. On the other side of the coin, if you pay child support, you cannot deduct it from your Federal or State taxes.

Understanding Alimony and Taxes

While child support payments are not taxed and cannot be deducted, the same is not true for alimony. Alimony is taxable to the recipient at the State level. So, in New Jersey if you are the one paying alimony, that alimony is eligible to be tax deductible on your State returns The key is that for it to be deductible on your State returns, it must be made under the divorce decree—any extra payments made outside of the divorce agreement would not be deductible. However, in a stark contrast (and this is the bad news), at the federal level, alimony is no longer taxable to the recipient or deductible by the payor for divorce agreements executed after December 31, 2018. For agreements prior to that time, alimony was taxable and deductible accordingly and hopefully, your divorce agreement explicitly states so.

The impact of the above is significant when negotiating the terms of alimony in any divorce case. The reason that it is significant is the number has to be tax affected, so to speak, to account for whether one will be taxed at the State level or able to deduct the alimony at the State level, but a separate calculation because the Federal level does not permit same. This is where things can get complicated and having a knowledgeable attorney by your side to navigate this to ensure you are paying, or receiving, the objectively fair amount with all things considered, is very important.

Equitable Distribution & Taxes

Unlike alimony, equitable distribution settlement agreements are not a taxable event. It is important, however, that the split of marital assets and marital liabilities be expressly specified in a formal written document for it to be considered non-taxable. It would not be beneficial for you or your spouse to have verbal arrangements or “side deals” because not only does that create complications in the future, but it could also have negative tax consequences should anything be called into question.

Is Tax Debt Split in a Divorce?

There are many tax questions to be answered during divorce, and “Is tax debt split in divorce?” is one of the most common. Many people who owe taxes to the Internal Revenue Service or the state of New Jersey wonder whether tax debt is split in a divorce.

Like marital assets, which are subject to be divided in New Jersey using equitable distribution, debt incurred during marriage is also subject to division. This is generally true for tax debt as well as other types of debt. But like so many circumstances in divorce, the individual situation of you and your spouse and the reasons how and why that tax debt was incurred is important and critical to the analysis of whether your tax debt will be divided between you and your spouse in your divorce, or, perhaps the discussion is more about the percentage allocation of who owes what towards that debt.

For example, if back tax debt was incurred by a spouse prior to marriage, it may be considered separate debt because the marital enterprise had nothing to do with why that debt was incurred. If taxes are related to a separate business that one spouse owns and perhaps did not pay required taxes on, the non-business-owning spouse may have an argument that they are not responsible for the debt. However, if funds ‘saved’ from not paying the IRS was otherwise reallocated towards marital expenses and same could be proven, then one could argue the business tax debt is, in fact, a marital debt. In another example, if you and your spouse were married but filed taxes separately, you may not be liable for your spouse’s tax debt depending on the specific situation just like some of the other examples above.

Every individual’s situation is different when it comes to the area of tax debt in divorce. Once our attorneys learn all the details of your case, we can more closely advise you.

Are There Tax Advantages to Being Divorced?

If your divorce was finalized before the end of the tax year, you cannot file jointly. You will either file as single and lose the tax advantage, or file as head of household, depending on the circumstances. From the single filing perspective, there may not be a tax advantage to being divorced. On the other hand, if you and your spouse both had high incomes and are involved in a high-net-worth divorce, there could be some advantages to being divorced due to the potential marriage penalty, which, depending upon your income situation, can apply a higher tax rate to you and your spouse if you filed jointly then if you had been single and both filed that way. This is why we work closely with Certified Public Accountants and other tax professionals to request that they run hypothetical returns in varying methodologies to determine the most advantages approach for both you and your spouse. The other things to bear in mind is that there is significant financial exposure if one party decides to file single without the knowledge and consent of the other party and that choice of filing creates a higher liability or lower refund for the other party. The person who rushed to file could be on the hook to pay for the monetary difference to the other party.

Do You Have Questions About the Tax Implications of Divorce? Contact our Experienced Hackensack Divorce Lawyers to Arrange a Case Evaluation.

Federal and state tax laws are dynamic, which is why you should speak to our attorneys if you have tax concerns that relate to your divorce. There are many issues surrounding taxes and divorce in addition to those discussed here. Is a lump sum alimony or equitable distribution settlement taxable? Do tax implications remain even long after the divorce is over? How does the timing of a divorce affect taxes? Once we meet with you and learn the details of your divorce, we can answer your questions about divorce and tax issues in New Jersey and help you develop a strategy that addresses your concerns.

Contact [MFR] Men’s & Fathers’ Rights Divorce Lawyers by Schultz & Associates, LLC to schedule a case evaluation with our experienced New Jersey divorce lawyers at (201) 880-9770 for help.

Carrie S. Schultz, Esq.

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