Two rings during a divorce

Tax Considerations for Couples Who Are Separating

By Michael DiFalco

The process of separating takes a toll on you emotionally, but it also has a big impact on your finances, including your taxes. Divorce and taxes are inextricably linked, making it necessary to turn to a divorce attorney who can help you navigate the process. Learn more about what you need to know about your taxes if you’re separating. 

Divorce and Taxes: Joint Filings

If you filed your taxes jointly before or during your divorce, you need to know that you are jointly as well as individually responsible for those taxes and for any penalties or interest due. That’s the case even if you decide to separate during that tax year. 

If your spouse under-reported their income and you filed jointly, both you and your spouse are liable. One spouse may be held responsible for the taxes, even if the other spouse earned the income. 

These dangers make filing jointly risky even though the Internal Revenue Code does offer “innocent spouse relief.” A divorce attorney can help you better understand what you can expect if you file jointly. 

Critically, courts will usually rely on those joint tax returns when determining income, especially for temporary support determinations, so signing a joint tax return can have a significant impact on the financial support a party may receive or be obligated to pay, unless there is good reason presented to the court.

Spousal Maintenance and Child Support 

Spousal maintenance is no longer tax deductible and is no longer shifted to the other spouse’s taxable income pursuant to Federal law. It is for NYS law, but due to the Federal changes the tax impact is more complicated than it was prior to 2018. Anecdotally, in most agreements and temporary support orders the amount of maintenance to be paid is not taxable any longer.

Child support payments are tax-neutral, resulting in no tax consequences. The spouse making the payments can’t deduct them, and the spouse receiving the payments can’t be taxed for these funds. 

Assets Sold at Separation

If you and your spouse plan on selling an asset as part of a property division during a divorce, it’s crucial to consider the tax implications and their allocations. For example, if you get the proceeds from the sale of a house, you may be responsible for the capital gains tax (although there is a significant exclusion for primary residences so most people do not owe capital gains taxes). That’s why having a divorce lawyer at your side makes a difference when negotiating the selling of marital assets. 

There are greater capital gains and taxation issues in more complex high-net-worth divorce cases, as well as those involving various investment properties, investment accounts, long term stock holdings, stock options and units awarded by an employer, as well as other assets which have capital gains implications. Understanding how the tax issues work may require an accountant as well as an attorney, depending on the complexity, but recognizing the need for that analysis is critical to avoiding a very costly underestimation of the tax consequences while negotiating a settlement.

Retirement Assets

For most couples, retirement accounts make up a big part of marital assets that need to be divided. Pre-retirement withdrawal of funds usually comes with large tax penalties, but divorcing employee spouses can allow for the withdrawal of funds that then go to non-employee spouses — and all without risking a penalty. 

The division, however, must be specified in a qualified domestic relations order, which allows for the transfer or distribution of retirement assets from one qualified retirement account to another party’s retirement account. Retirement accounts are always held in one individual’s name, so transferring some of these valuable marital assets to the other spouse, without tax consequences, is an important part of the divorce process.

Choosing a Qualified Divorce Attorney

It’s tough to deal with the emotional, financial, and legal implications of getting a divorce. By turning to a divorce attorney if you’re considering separating from your spouse, you can get the guidance you need. 

At Aiello & DiFalco, we can represent you in all aspects of family law in New York. From child custody and support issues to divorce, we are here to help. Contact us at Aiello & DiFalco in Garden City, NY, to get the family law support you need as you consider separation.

About the Author
I am a partner at Aiello & DiFalco LLP, and my priority for my clients is to guide them through an arduous court case to provide them with the opportunity to write the next chapter in their life. I tailor my approach to each client’s priorities and positions, and to the extent that matters can be predicted, I will always provide a realistic perspective of how the law could be applied to the particular facts and circumstances of a case. Since I thrive on helping people and solving problems, I bring an optimistic and positive approach to practicing in a very difficult area of law. With more than a decade of experience handling hundreds of cases, I have the ability to get results on the issues my clients view as priorities. When cases or certain issues cannot be settled, I have a solid record of success at trials, hearings, and on appeals. Feel free to contact me for a free initial consultation, I am always available to help.