Income Tax Considerations of Divorce

Timing of Divorce

The Internal Revenue Service defines how individuals file income tax returns based on their marital status as of December 31st.   While still married, the individuals can file a Married Filing Joint Return or each individual can file a Married Filing Separate Return.  Once divorced, the individuals will file separate returns as Single Individuals.

A divorce finalized in December versus January or vice versa could have a significant tax impact.   While tax implications should not be the only consideration taken into account to determine the timing of the divorce, a tax projection could allow for a planning opportunity to save a significant amount of taxes.

Tax forms and money


Who gets to claim the children as a dependent is often an argument that may be simplified with some knowledge of their tax situation.  It is not uncommon for one or both of the parents to blindly want the tax deduction for the personal exemption of the children without knowledge of what it really means to them in terms of dollars.  The ability to claim the dependent as a personal exemption can be quantified so the divorcing parents can make informed discussions.

Along with the personal exemption, there are child tax credits and education tax credits tied to who claims the children.  Each of these credits are phased-out based on income so it further reinforces the need to evaluate the options so as to fully utilize the benefits.

Division of Property

The IRS states that transfers between spouses incident to divorce are generally not taxable.  As such, once an agreement on the division of assets is reached, the process of transferring the assets will generally not trigger any immediate income tax consequences.

While this seem pretty straight forward, it is important to note that not all assets are equal.  In the division of assets, you may receive property that has a tax consequence in the future.  An example of these types of assets would be retirement accounts, appreciated stock, stock options, etc.   These tax consequences should be evaluated and considered when deciding on how assets are to be divided.

Support Obligations

Child support is not taxable to the receiving spouse and it is not a deduction for the paying spouse.  Maintenance (Alimony) generally is taxable to the receiving spouse and it is a deduction for the paying spouse.

As maintenance is a taxable event, there is a difference between gross maintenance paid and net available after tax.  Without an understanding of these, unintended consequence could result.  A cash flow analysis showing the effect of taxes on maintenance can be used to make sure everyone is on the same page.

Fluctuating maintenance or a defined termination of maintenance can potentially trigger scrutiny by the IRS. It is necessary to evaluate any potential maintenance recapture or an IRS reclassification of maintenance to child support.  Both of these are used by the IRS to prevent the abuse of calling either a child support payment or a property division transfer as a maintenance payment to take advantage of the disparity of individual’s tax rates.

Addressing Maintenance (Alimony) in Your Divorce Case

Divorcing parties are often concerned about financial assistance to or from their ex-spouse after a divorce.  In Missouri this form of financial assistance to an ex-spouse is called maintenance, formerly called alimony.  There is no agreed-upon mathematical calculation for determining when one is eligible to pay or receive maintenance, for how long, and in what amounts.  Thus, maintenance is an issue that is often bitterly fought over in litigated cases.

Parties who choose the collaborative process to resolve their divorce are fortunate to have resources to help them think about and make intelligent and informed decisions about maintenance:  whether maintenance should be considered at all and, if so, in what amounts and for what period of time.

When should maintenance be considered?

The first consideration is whether both spouses can be self-supporting after the divorce without financial assistance from the other.  Do both parties earn enough money from employment to pay their reasonable monthly expenses? Does either party have an ongoing health condition? Does one party have significantly less earning power than the other?  If one party cannot for a good reason be self-supporting after the divorce, you and your spouse might then look at whether the other party has enough income to help out and still have enough money left over to pay his or her own reasonable monthly bills.  Your collaborative attorney can help you analyze whether maintenance is appropriate to consider in your case.

How much maintenance can I expect to pay or receive?

Your financial neutral can create financial “scenarios” to show you how payment or receipt of maintenance in different amounts might affect your financial picture over time. Maintenance is usually deductible for the paying party and counts as income to the receiving party on his or her tax return. You and your spouse can use the financial scenarios to reach your own decisions about how much maintenance will be paid and whether it stays the same, increases, or decreases over time.

How long can I expect to pay or receive maintenance?

In the collaborative process you and your spouse can look at your individual circumstances and come to creative solutions that meet the interests of each of you. For instance, maybe one spouse needs education or training to obtain optimal employment and expects to then become self-supporting.   Or, maybe both parties want one spouse to remain home with the children for a period of time before returning to work full-time and that spouse needs maintenance only until the parties agree it’s appropriate for him or her to return to employment. With the help of your collaborative attorneys, your coach, and your financial professional, you and your spouse can discuss what you want for yourselves, each other and your children as you make decisions about how long maintenance might be paid.

Fighting this issue in court can turn into a bitter and expensive battle with your spouse.  Using the collaborative process to analyze this issue allows you, with the support and help of your collaborative team, to take a serious look at your financial status after the divorce and make important decisions about whether and how maintenance might fit in.