When going through a divorce, acknowledging and addressing the various tax implications involved in the process can result in significant savings for both spouses while also opening up more opportunities for compromise during settlement negotiations. Although often overlooked, there are numerous ways in which a divorce can trigger tax liability or tax-savings opportunities, and understanding all of the various tax implications of your divorce is critical to avoiding unnecessary tax liability.

Addressing Tax Considerations During Your Divorce: Five Common Issues

If you are preparing to file for divorce in Texas, here are five tax-related considerations to keep in mind:

1. Alimony

Under provisions of the Tax Cuts and Jobs Act that take effect on January 1, 2019, alimony payments will no longer be tax deductible, and alimony recipients will no longer be required to report payments as taxable income. This is a reversal of the law that has been in place for decades, and it is likely to have a significant impact on many high-net-worth divorces in McKinney, TX.

Importantly, the alimony provisions of the Tax Cuts and Jobs Act only apply to divorces finalized after December 31, 2018, and they do not apply retroactively to pre-existing divorce orders. 

2. Personal Exemptions and Tax Credits

Prior to the Tax Cuts and Jobs Act, parents were able to negotiate personal exemptions for dependents as part of the divorce process. But, with the new law eliminating these exemptions through 2025, they are not likely to play a significant role in divorce negotiations for the foreseeable future.

The Tax Cuts and Jobs Act increases the existing child tax credit from $1,000 to $2,000, and it creates a new $500 credit for non-child dependents. However, due to their limits on eligibility (a person claiming one of these deductions must have primary custody for six months of the year), while these credits are certainly relevant to divorcing spouses, they are also unlikely to play a significant role in negotiations.

3. Mortgage, Home Equity and Other Itemized Deductions

When apportioning mortgage and home equity debt as part of the property division process, factoring in the applicable tax deductions can help ensure an equitable distribution. The same goes for various other itemized deductions as well (although the Tax Cuts and Jobs Act limits the number of taxpayers who will benefit from itemizing their deductions).

4. Retirement Assets

As a general rule, dividing or distributing retirement assets prior to the date of retirement can trigger substantial tax penalties. However, one major exception to this rule is distribution in the event of a divorce. Through the use of a qualified domestic relations order (QDRO), divorcing spouses can divide retirement assets without incurring unnecessary liability to the Internal Revenue Service (IRS).

5. Filing Status

Your filing status can have a significant impact on your overall tax liability both during and after your divorce. While checking “married filing jointly” on your return may reduce your tax liability if your divorce continues into the new year, it can also expose you to liability for your spouse’s errors and omissions. Negotiating the ability to claim “head of household” status after your divorce can result in tax savings as well; however, your ability to claim head of household will ultimately depend upon your child custody rights. 

Speak With an Experienced Divorce Lawyer in McKinney, TX

If you have questions about the tax implications of getting divorced in Texas, we encourage you to contact us for a free initial consultation. To speak with one of our McKinney divorce lawyers in confidence, please call (214) 726-1450 or request an appointment online today.