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Tax Issues in Divorce

When going through a divorce, spouses are faced with making many, many decisions.  Unfortunately, oftentimes tax implications related to the divorce are overlooked, which can cause further issues, legal fees, and distress.

As such, identification and discussion of tax issues with your divorce attorney are important to address.  Such as:

At what point am I considered “divorced” for purposes of filing my taxes? 

You are considered “married” for purposes of filing taxes if your divorce is not final by December 31st.  In Nebraska, your divorce is not considered “final” until 30 days after it is signed by the judge. Therefore, if your divorce decree is signed December 1st or after, you are still considered a married couple for tax filing purposes for that tax year.

Can the judge order me to file taxes jointly with my spouse during our divorce? 

In Nebraska, you cannot be compelled by a court to file your taxes a certain way.  However, depending on the facts of your case, if a court finds that you “unreasonably” withheld your consent to filing jointly, then the judge can take that into account when allocating each spouse’s annual tax liability in your case.

If I can file jointly with my spouse, should I?

Unfortunately, there is no “one size fits all” answer to this question. Generally, your attorney will instruct you to select the filing status that is most favorable from a financial perspective.  filing joint with your spouse is a more favorable status from a financial perspective. Your attorney will likely instruct you to consult with a CPA to determine which filing status will be most favorable.

Does paying or receiving alimony impact taxes in my divorce?

No.  Prior to 2018, alimony was taxable to the payee and it was an allowable deduction by the payor.  In 2018, the tax law eliminated the tax implication for alimony payments (i.e. alimony is no longer considered a deduction to the payor or income to the payee).

Is child support taxable?

No.  Child support payments are neither deductible by the payor nor taxable to the payee.

Is a property judgement/settlement payment taxable in my divorce? 

No, the transfer of property via a property settlement payment in a decree is not considered a taxable event.

Who will get to claim the child(ren) on their taxes?

Your decree will include a provision that specifically awards the child(ren) as dependents (and award the corresponding tax credit) to each spouse in a fair manner.  Generally, spouses alternate the ability to claim child(ren) as dependent on their tax

If child support is ordered in your case, most often the decree will also specify the payor spouse must be current with his/her support by a date certain (usually the 10th or 15th of January the proceeding year) to be eligible to claim the child(ren) as dependents on the corresponding tax return.

Are division of retirement/pension assets taxable in a divorce?

No, as long as such transfer is deemed “incident to divorce” in your decree.  It’s important to have an experienced attorney assist you in the division of retirement assets.  While the division of retirement accounts in a divorce is not taxable, if a spouse takes a distribution of retirement funds, the distribution will be subject to regular income tax.  However, it may be possible to receive a portion of the assets without incurring the 10% early withdrawal penalty (applicable if you are under the age of 59 ½). Your attorney will likely instruct you to consult with a certified tax advisor regarding same.

At Koenig Dunne, we are committed to identifying and advising you on tax issues and their implications in your case. Contact us today to discuss your tax related issues in your divorce case. When necessary, our attorneys will partner with tax experts to pursue the most favorable outcome regarding the interplay of taxes in your divorce case.