Tax return after divorce: is the upkeep taxable?

If you are thinking about collecting taxes after a divorce, you may want to know how your taxes will change. The tax implications of divorce at the federal level are no longer as great as they used to be.

Each state has its own state income tax laws. How divorce-related payments and income are treated differs from state to state. Contact your state’s tax authority to learn how your state’s tax laws affect you.

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Here are the top federal tax areas related to divorce.

Maintenance taxation

The taxation of alimony on federal tax returns recently changed due to the Tax Cuts and Jobs Act of 2017 (TCJA). Maintenance payments or separate maintenance payments in connection with divorce or separation agreements dated January 1, 2019 or later are not tax-deductible today by the person liable for maintenance. The dependents do not need to report the maintenance payments as income.

Prior to the amendment to the Tax Cuts and Jobs Act, alimony was tax deductible by the payer. The dependent had to claim this as income in their federal tax return.

The Tax Cuts and Jobs Act also affects new amendments to divorce agreements signed before January 1, 2019. In particular, changes to the original agreement may change the tax implications of maintenance payments. If your divorce papers explicitly state that the alimony deduction will be canceled, payments from your divorce contract will be taxed according to the new rules.

How the IRS defines alimony payments

To qualify as alimony or split maintenance, the payments you make to your ex-spouse must meet all six of these criteria:

  1. You are not filing a joint tax return with your ex-spouse.
  2. You can make payments in cash, by check, or by postal order.
  3. You are making payments to or on behalf of a spouse or ex-spouse under an applicable divorce or separation agreement.
  4. Legally separated spouses may not live in the same household when making payments.
  5. Liability for the payment does not extend beyond the death of the spouse receiving the payment.
  6. The payment is not child support or asset compensation.

Some divorce payments do not count as alimony

In defining alimony, the IRS specifically excludes certain payments as they do not qualify for alimony or separate alimony treatment. These include:

  • Child support
  • Property, plant and equipment accounts
  • Payments to maintain the maintenance payer’s property
  • Payments for the use of the debtor’s property
  • Voluntary payments that are not required under a divorce decree or separation agreement

If a dependent person also has to pay child benefit but does not complete the payment for both of them, the payments would go to child benefit first for tax purposes.

If you live in any of the states listed below, consider any property or income that you and your spouse own as jointly owned. Payments that represent your spouse’s share of the community assets do not count as alimony.

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Wisconsin
  • Washington
  • Texas

Where to declare maintenance on your tax return

If you have a divorce settlement signed before January 1, 2019, it’s easy to report alimony paid and received on your tax return. You simply enter the maintenance paid or received on Form 1040, Appendix 1.

  • If you are the person receiving child support: Enter the amount in line 2a. In line 2b, you must enter the date of the original divorce or separation agreement. You will also need to provide the payer with your Social Security number or face a $ 50 fine.
  • If you are paying alimony: You enter the amount paid in line 18a. Debtors must also include the social security number of the beneficiary on line 18b and the date of the original divorce or separation agreement on line 18c. Failure to provide the recipient’s Social Security number could result in a $ 50 fine.

Individuals with divorce settlements dated January 1, 2019 or later are not required to include child support information on their federal income tax returns.

If you are required to declare maintenance income on your tax return and forget to provide this information, you will have to pay the usual penalties and interest for failing to declare your income adequately.

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Ways To Lower Your Taxes During A Divorce

If you get divorced, planning the divorce settlement can save you taxes in the future. While alimony can no longer be reported as a deduction or income, other tax implications may affect your future tax returns.

Entitlement to dependents

Filing a dependent tax return depends on many factors. The custodial parent will usually claim maintenance, but the custodial parent for tax purposes cannot be the same person who has legal custody. The custodial parent for IRS purposes is the parent whose home the child sleeps most nights in during a year.

In certain cases, the non-custodial parent may be entitled to the maintenance creditor if they meet the following four conditions:

  • The parents are:
    • Divorced or legally separated due to divorce decree or separate maintenance
    • Separately as part of a written separation agreement
    • Always live separately for the last six months of the year
  • The child in question received more than 50% of their support from their parents during the year
  • The child is in the care of one or both parents for more than 50% of the year
  • The custodial parent signs a written declaration stating that they will not claim the child as a dependent for the year and the non-custodial parent attaches the written declaration of their return in the event of divorce after 1984

Even if non-custodial parents can claim the dependent on their tax return, certain tax breaks cannot be claimed by a non-custodial parent. These include:

Choose assets carefully

A division of assets during a divorce usually does not result in a taxable event: at the time of the divorce, you usually do not have to pay any tax on profits or losses. However, if you received an asset in a divorce and want to sell the asset for a profit in the future, you must pay the tax due on the total appreciation amount, not just the appreciation amount since the divorce.

For this reason, it is important to carefully choose the assets you want in a divorce. For example, receiving cash from a bank account will not result in a profit or loss. However, if you were to accept $ 75,000 in stocks on a $ 25,000 basis, that means you would also make an untaxed profit of $ 50,000.

Choosing $ 75,000 in cash versus the stock would be a more efficient tax decision. Most divorce lawyers are aware of this tax implication. You will consider the tax implications in the divorce settlement.

Remember, at TurboTax, we ask simple questions about your life and help you fill out the correct tax forms. Regardless of whether you have a simple or complex tax situation, we are there for you. Feel secure in doing your own taxes.

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