Tax Consequences of Divorce – A Summary of Issues
Divorce naturally brings many changes, particularly financial ones. Many of these financial changes can impact your tax liability, so it is important to keep certain factors in mind when going through a divorce or family change. The financial changes, along with all the other complicated pieces involved in divorce, are best handled by a lawyer with strong financial knowledge to ensure the most equitable outcome for your financial future. Here are some key components to think about when it comes to divorce and taxes:
The Marital Home
In many cases, much of the family’s financial assets are tied up in the marital home. Tax attributes of all the marital assets must be carefully evaluated to prevent a tax windfall to one party at the expense of the other party. Sometimes events that are speculative or not certain to occur can factor into how your divorce proceeding ends up. Courts may consider future tax consequences when dividing marital property in divorce cases. Maurer v. Maurer, 623 N.W.2d 604 (Minn. 2001).
If one party keeps the marital home, the other spouse may be bought out, the other spouse may be given a lien for when the home is eventually sold, or there can be an agreement detailing when the home will be sold and what each party will receive. There is no tax consequence to the party that gives up the home and the transfer is viewed as a gift for tax purposes. If both parties retain the home as joint owners and opt to immediately sell it, the profit is split and each spouse is entitled to exclude from the gain on the sale of the home up to the $250,000. Proceeds from eventual sale of the marital home do not have to be divided equally, though retaining joint ownership of the home incurs to each party to equal tax liability from the gain on the sale.
Income Taxes
When filing your yearly income tax, you have the option of filing as a Head of Household or Married Filing Jointly. After your divorce, you will be a Single taxpayer, sometimes with dependents. Going from a married position to a single position, you will likely have an adjustment to the total income earned by your household and your taxes will reflect that. Treat these choices carefully, as you may need to split any tax windfall or liability with your former spouse. Also, important to note is that you may not amend your tax return unless you do so in a timely manner. Even then, you cannot amend your tax filing to state you were a single person—you must determine that status based on December 31 of the year in question, whether or not you had filed for divorce yet.
Attorney Fees and Spousal Maintenance
Alimony and spousal maintenance are two terms for the same concept—money paid from a higher earning spouse to a lower earning spouse. It is determined based upon need. Lyon v. Lyon, 439 N.W.2d 18 (Minn. 1989). Deductions for spousal maintenance payments are currently not deductible per the Tax Cuts and Jobs Act of 2017 (TCJA). They may be deductible if the TCJA is not renewed in 2025. To be deductible, payments must be made pursuant to a divorce or separation instrument, paid in cash to the receiving spouse (i.e. not transfers of property), and not disallowed under the separation instrument signed by the parties. Furthermore, the payor and payee may not reside in the same household, there must be no liability for the payor to continue paying after the payee’s death, and payment cannot be a fixed amount that would serve as child support payments.
Similar to spousal maintenance payments, legal fees for divorce or separation are similarly not deductible for the current tax year under 26 U.S.C. §67(g). A way for parties to be able to deduct some of the costs associated with divorce is to allocate those losses to property acquired in the divorce.
Expert Family Law Representation
At Lake Harriet Law, we work diligently for our clients, to help them receive the best terms in their divorce, including a fair and equitable financial settlement. If you are considering a divorce, contact our team to begin designing a legal strategy to protect your future.
Randall A. Smith – Managing Attorney 612-750-4843
Brianna Attamante – Student Attorney 612-223-8925
Brooke Meister – Student Attorney 612-223-8925