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Divorce and Year-End Tax Planning

By March 12, 2014July 21st, 2023Tax Planning

This article identifies some of the most common year-end tax issues that arise in the year of a dissolution of marriage (divorce). These issues are very complex; so bear in mind that this summary does not attempt to provide exhaustive coverage of the subject. If you are going through a divorce and are concerned about related tax issues, you should discuss them with a qualified attorney. The attorneys at Paule, Camazine & Blumenthal, P.C. can assist you in these matters.

Filing Status

Your tax filing status (individual, joint, etc.) determines the rate at which your yearly income is taxed. For a few married individuals, it may be preferable to file taxes individually; however for most, filing jointly with a spouse results in lower taxes. Which filing options are available depends on your marital status on the last day of the year. In other words, if as of the last day of the year your divorce is final, you may not file your taxes as married (filing jointly or separately) for that year. Conversely, if on the last day of the year you are separated, but the court has not issued a final divorce decree, you may still file jointly with your spouse. Thus, from a tax standpoint, it may be beneficial to wait until January 1st of the following year to finalize your divorce in order to preserve the ability to file jointly. However, note that while filing jointly may lower the overall tax burden, it also means that both spouses are ultimately liable for one another’s tax liability for that year (subject to an “Innocent Spouse” exception).

Your marital status on the last day of the year can also affect your ability to file your tax return as “Head of Household.” Head of Household status usually provides significant tax advantages; however, it is generally easier to qualify if single (divorced), than if separated, but still legally married. Thus, depending on your circumstances, it may be preferable to finalize the divorce before the end of the year to qualify as Head of Household for income tax purposes.

Income & Deductions

If the parties finalized the divorce before the end of the year, then filing jointly is not an option. When a couple is married for only part of the year, each spouse may wonder who should report certain income and deductions incurred while married, especially when the income is generated from joint accounts or jointly owned assets. Generally, the spouse who earned the income should report it in his or her return, regardless of the fact that the money may have then been spent to benefit the other spouse. On the other hand, income generated by jointly held assets or accounts is usually divided equally.

Deductions are essentially treated the same way. For instance, deductions for mortgage interest and real estate taxes paid from a joint account on real property owned jointly by the spouses while married can be divided equally. At times, a divorce decree may require you or your former spouse to pay home mortgage interest on a home owned by both of you. In these cases, the IRS provides that the paying spouse may deduct the entire payment, half as alimony and half as mortgage interest. Conversely, the non-paying spouse must include one half of the payment as alimony income and may deduct the other half as a mortgage interest deduction.

Property Taxes

Divorce invariably involves the division of property between soon-to-be ex-spouses. Concerns often arise regarding who should be liable for property taxes assessed on the assets distributed pursuant to the dissolution decree. If a spouse obtains a piece of property as a result of the divorce, then that spouse will have to come up with the cash to pay for the local property taxes. Depending on the spouse’s financial circumstances, this “award” can result in significant liquidity concerns. For this reason, it is important to understand that local property taxes are generally assessed on the first day of the year. In other words, if you own a piece of taxable property on the first day of the year, you will be liable for the related property taxes for that year. Timing considerations are especially important when there is significant income disparity between spouses. In these situations, if the lower-income spouse receives taxable property as a result of the divorce, he or she may be unable to raise the capital needed to pay taxes on it, forcing him or her to ultimately sell the property.
Thus, the timing of the divorce, which in turn affects the timing that property is transferred from one spouse to the other, becomes a very important issue to discuss with your attorney as well as with the other side during settlement negotiations.

These are just some of the issues that the attorneys at Paule, Camazine & Blumenthal, P.C. take into account when representing clients in their divorce proceedings.


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