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Getting a divorce? There are tax issues you need to understand

September 21, 2019 Stuart Mordfin, CPA, CGMA divorce

Getting a divorce? There are tax issues you need to understandIn addition to the difficult personal issues that divorce entails, several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are four issues to understand if you are in the process of getting a divorce.

  1. Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)
  2. Child support. No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).
  3. Personal residence. In general, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect the exclusion for the spouse who moves out.

    If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.
  4. Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.

A range of other issues

These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.

© 2019

Stuart Mordfin, CPA, CGMA

Written by Stuart Mordfin, CPA, CGMA

Stuart M. Mordfin has over 30 years of experience as a certified public accountant. He has worked with clients in such diverse industries as manufacturing, publishing, real estate development and operations, jewelry and other luxury products, retail, restaurants, a variety of professional service companies. In addition he has on numerous occasions worked as a court appointed accountant on receiverships, guardianships and bankruptcies. Stuart has developed and expanded his CPA practice through innovation, well-informed decision-making, and creative, proactive thinking. Stuart M. Mordfin joined the firm in 1987, and has been a partner since 1999. He became managing partner in 2004. Since his entrée into the firm, Stuart has lead the way for its expansion into financial planning services through the formation of Mordfin Financial & Business Advisors LLC. Stuart works with many family-owned businesses. Experiencing firsthand what it means to be an integral part of the family business, Stuart is able to offer a unique and valuable perspective to his clients. He is well qualified to assist family-owned businesses move from one generation to the next.

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