Divorce and Taxes
By Michael Murray, Tax Controversy Attorney in Raleigh, North Carolina
The Tax Cuts and Jobs Act of 2017 made sweeping changes to law as they relate to divorce and taxes primarily to eliminate a lot of underreporting of income by alimony recipients. As a result, many new laws became effective that impact tax treatment due to divorce.
For divorce or separation agreements executed after 2018, alimony is no longer deductible by the payor spouse and is not included in income of the recipient.
From 2018 to 2025, there is no deduction for dependency; beginning in 2026, however, this deduction will become effective once again. Typically, when the deduction is allowed as it will be again in 2026, the spouse who has legal custody gets the exemption. The divorcing couple can enter an agreement as to who takes the dependency exemption deduction. If the noncustodial parent gets the deduction per an agreement the custodial parent is required to sign IRS form 8332.
This one aspect of divorce and taxes continues to remain the same – child support is not deductible by the payor nor is it considered taxable income to the recipient.
If the marital home is sold pursuant to divorce, the couple can generally exclude up to $500,000 of gain from the sale of a primary residence (this applies to married couples selling a primary residence as well).
Pursuant to divorce, assets such as pensions, 401(k)s or IRAs need to be split. A qualified domestic relations order (QDRO) gives a spouse a right to share in the deferred tax treatment. Without a QDRO, this benefit cannot be received.
Owing Back Taxes
One big issue that may arise during divorce and taxes is that of settling who owes back taxes. Filing jointly results in joint and several liability of the taxes owed meaning that both taxpayers are legally responsible for the entire amount. This responsibility remains intact even if the marriage does not. Legal separation or a divorce decree will not wipe away this debt.
The Innocent Spouse Relief tax law was created to help provide some relief under the right conditions. An innocent spouse may become unburdened of these joint and several liabilities when the other spouse failed to report income, reported income incorrectly or took improper deductions or credits given certain criteria are met.
There are many qualifying conditions to gain relief under the Innocent Spouse Relief Act such as showing that the error is solely attributable to the other spouse. This requires the assistance of a knowledgeable tax attorney, NOT your divorce attorney. It requires knowing the time restrictions to qualify and how to navigate the burden of proof restrictions. For more information on the Innocent Spouse Relief Act, read our previous blog post here.
Seek an Experienced Tax Attorney’s Advice
Divorce and taxes mix for a murky legal area. Add an experienced tax attorney to your legal team. Many of these issues may fall outside the scope of family law representation during the divorce. Contact us today for a consultation.