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The possible tax implications of a divorce

Writer's picture: Rob DavisRob Davis

Updated: Nov 23, 2024

Tax implications of a divorce


For most people, divorce is one of the most challenges events in life. So much focus is on child custody, the division of assets and hurt feelings. However, in a divorce where significant assets are involved, it is important to have an understanding of the tax implications of a divorce in Missouri. A few of the tax-related issues divorcing spouses need to be familiar with include tax return filing status, tax consequences regarding the division of assets, how child custody affects tax status, and the tax issues associated with child support and maintenance (aka alimony).



Tax issues in a divorce

IRS form 1040 requires a tax return filer to select a filing status when submitting their federal tax return. Filers can choose from single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse. Your filing status will affect your filing requirements, standard deduction, eligibility for tax credits and the proper amount of your tax. The filing status is based on your marital status as of December 31st.  If the spouses were married on December 31st, then their filing status for that tax year should be married filing separately, or married filing jointly.

 

Following the divorce, if children are involved then one parent can file their tax return using the head of household filing status. To qualify for the head of household status, your dependent needs to live with you full time for at least 6 months out the year, you need to provide more than half of the living expenses for the child, and your ex-spouse must not have lived with you for more than half of the year.  The head of household filing status will result in less taxes owed than filing single.

 

However, usually the judgment of child custody or divorce will stipulate which parent gets to claim the child as a dependent for tax return purposes in each given year. In many such agreements, the parents alternate claiming the child as a dependent every other year. Remember only one parent can claim a child as a dependent in a given year.


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Retirement accounts

 

Retirement accounts are often some of the most valuable assets which need to be addressed during the division of property in a Missouri divorce.  If funds from these accounts are withdrawn before the account holder reaches the age at which the plan allows distributions, there will likely be early withdraw penalties and tax consequences. Fortunately, when a court orders the division of a retirement account in a divorce, usually these fees do not apply.  This is because the Internal Revenue Service has considered these issues, and provided that retirement accounts split according to a Qualified Domestic Relations Order (QDRO) are not subject to the penalties and fees.

 

QDRO’s are court orders that are produced alongside the dissolution of marriage judgment.  401(k), 403 (b) and most pension plans are divided by sending the plan administrator the QDRO.  The recipient spouse can then take the funds they receive from the division and roll them over into their own retirement account, such as an IRA, and thereby avoid any tax consequences.

 

Unfortunately these orders are complicated and time consuming and can significantly increase legal fees in a divorce.  Additionally, pensions plan administrators charge a significant administration fee to divide the retirement assets. For this reason, the parties to a divorce should weigh their options of whether splitting a pension account is cost effective, and if there might be a better alternative arrangement. Instead of dividing the account, in many instances the owner of the account will simply buy out the ownership of the other spouse.

 

In many cases, dividing individual retirement accounts (IRA’s) do not require a QDRO.  Most investment companies offering IRA’s often just need a copy of the judgment for dissolution of marriage with details of how the account should be divided. Albeit the vast majority of retirement accounts and plans are divisible in the event of a divorce, there are rare exceptions. One such exception is that Missouri public school pension accounts for teachers cannot be divided under Missouri law, and thus remain the property of the educator even after a divorce.

 

Are your attorney’s fees paid during your divorce tax deductible? 

 

In the past, a portion of your legal expenses may have been tax deductible. Prior to 2019, the Internal Revenue Service allowed payors of maintenance (aka alimony) to their ex-spouses to deduct these payments from their taxable income when filing their federal tax return.  Similarly, the payee spouse (the one receiving the maintenance payments) was required to report the payments as taxable income on their own filings. To this end, attorney’s fees involved with determining maintenance were tax deductible.


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This all changed at the end of 2018 when the Tax Cuts and Jobs Act was passed.  Now, maintenance paid is not tax deductible nor does the payee spouse need to report the payments as income. The one caveat to this is divorce or separation agreements executed prior to 2019 are grandfathered in.  This means if the divorce or separation was finalized before December 31st, 2018, then the old rules apply and the payments are tax deductible for the payor, and taxable for the payer.

 

Notwithstanding, if there is a modification of the divorce judgment that was executed prior to December 31st, 2019, then the new rule may apply. For the new rule to apply and the payments not be taxable, there are two requirements in the modification. First, the modified agreement must change the terms of maintenance or separate maintenance payments.  Second, the modified agreement must specifically state that payments are not tax deductible by the payer spouse or includable in the income of the receiving spouse.

 

Missouri child support payments are not tax deductible nor taxable to the receiving parent, because child support is considered tax neutral. The rule makes sense because prior to the divorce or child custody dispute your expenses in caring for your child were not tax deductible either. Expenses for your child are generally considered personal expenses and consequently not tax deductible.

 

When it comes to evaluating the tax issues associated with divorce and child custody disputes, it is indispensable to have at least an experienced family law attorney on your side.  If there are substantial assets involved in the case, it is advisable to consult with a certified public accountant to ensure you don’t pay more in taxes than you need to.

 

At the Men’s Center for Domestic Resolution, our passion is to help men through the rigors of divorce and child custody issues. Attorney Robert Davis is a single father with full custody of his 3 daughters. He has been through family law issues himself and is very passionate about helping men through these tough times to help them realize there is a light at the end of the tunnel.

 

If you are facing a divorce or child custody dispute, please call our office at (816) 287-1530.  If you do not call our office, please consult with another qualified family law attorney.


Your's truly,


Robert Davis, DDS, Attorney at Law

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The Men's Center for Domestic Resolution 

Robert Davis, Attorney at Law

1005 Cedar St. 

Pleasant Hill, MO 64080

816-287-1530

www.manlawkc.com

robert@kcmensdivorce.com

 

Cass County, Missouri Men's Family Law attorney
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