Coupled with all the emotional and legal complexities of a divorce in Florida is the financial disentanglement and division of your marital property. And this can significantly impact your taxes and other financial matters.
If you are navigating a divorce, you will want to understand how marital property division, child support, and spousal support have the potential to impact your taxes so you aren’t blindsided with unexpected tax burdens come tax time. At Melone Hatley, P.C., our experienced Tampa, Florida divorce attorneys are dedicated to being your partners throughout the divorce process, protecting your legal and financial interests each step of the way.
Your New Filing Status
The most obvious and immediate change in your taxes post-divorce will be your filing status. For that purpose, the IRS considers whatever your marital status is on December 31 of the year you are filing for. If your divorce was finalized on or before that date, you will file as either “single” or “head of household,” depending on your situation.
- Single – The simplest of all filing statuses, this will likely be your new status after your divorce if you have no dependents.
- Head of household – If you are claiming a child as a dependent, you may want to consider filing as head of household. In order to qualify for the head of household status, you must be single, legally separated, or married but living apart from your spouse for the last six months of the year, you must have a qualifying dependant, your home must be that dependant’s primary residence, and you pay more than half the cost of maintaining that home. The advantage of the head of household status is a higher standard deduction and a more favorable tax bracket than the single status.
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Changes in Your Tax Liabilities
Your divorce may also have led to changes in your overall income and tax liabilities. Your income may have shifted because of your division of marital assets. Furthermore, with the change in your filing status to a single filer, you might find it more advantageous to itemize instead of taking the standard deduction you may have taken as a married couple.
You should review your withholding or estimated tax payments in consideration of these changes so you don’t get surprised when it comes time to file your taxes.
Will You File Together or Separately?
If you were still married as of December 31 of the tax year you are filing, you can file jointly, providing you and your ex-spouse agree. This allows you to take advantage of the higher standard deduction. But if you choose to go this route, you will want to proactively address how you will handle any tax liability or refund. Your Florida divorce attorney can help you put these details in writing before filing.
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Who Will Claim Your Children as Dependents?
Who claims the children as dependents will be another important aspect of your tax planning after divorce. It’s important to understand that who claims the children as dependents will have an impact on tax credits and benefits available, so it should be given careful consideration. Generally, the primary custodial parent will claim the children as dependents, but your divorce settlement agreement can designate otherwise.
Custodial Parent Benefits
Generally, as the primary custodial parent, you will claim the child tax credit, which can significantly reduce your tax liability. For example, in 2023, that credit was up to $2,000 per qualifying child. You may also qualify for the Earned Income Tax Credit that provides significant financial benefits.
Non-Custodial Parent
A non-custodial parent may claim the children as dependents if provided for in the divorce settlement agreement or if the primary custodial parent agrees in a written declaration (IRS Form 8332).
Equally Shared Custody Arrangements
When parents share custody arrangements equally, who claims the children as dependents is generally provided for in the settlement agreement. Parents can forge their own agreements about who claims the children, even alternating years, agreeing to each take separate children as dependents, or splitting the tax benefits. In cases where ex-spouses can’t agree on who claims the children as dependents and there is no provision for it in their settlement agreement, the IRS has tie-breaker rules, and the parent with the higher adjusted gross income generally gets to claim the children as dependents.
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Alimony and Child Support
Child support and alimony (spousal support) have particular tax treatment, some of which has changed with recent tax reforms. When going through the divorce process it is important to understand how paying support will impact your finances moving forward. It is also important, if you are going to be receiving support, to understand how that can impact your income.
Alimony
For divorces finalized before December 31, 2018, alimony payments are taxable for the recipient and deductible for the payer. Due to the Tax Cuts and Jobs Act of 2017, spousal support is neither deductible nor taxable for divorces finalized after that date.
Child Support
Because child support is strictly for the child’s benefit, it is neither deductible or taxable, and it has no tax implications for either parent. While changes in the law eliminated the child dependency exemption through 2025, it doubled the child tax credit from $1,000 to $2,000.
Division of Property, Retirement, and Investment Accounts
Division of your marital property and retirement accounts could have significant tax implications if handled improperly.
Property Transfers
As part of your equitable property division, transfers from one spouse to the other during a divorce are not taxed by the IRS as long as the transfer is “incident to the divorce.”
However, in most cases, the marital home is a couple’s largest asset. If you and your spouse decide to sell the marital home and divide the proceeds, each of you must report your share of any gain or loss on your taxes. Fortunately, the IRS provides a capital gains exclusion for the sale of a primary residence in the amount of $250,000 for a single filer and $500,000 for a joint filer. To qualify for this exclusion, you must have owned and lived in the home for at least two of the five years preceding the sale. Any gains or losses beyond this must be reflected on your taxes.
Retirement Accounts
Retirement accounts are significant marital property that must be divided carefully during a divorce to avoid penalties and taxes.
A Qualified Domestic Relations Order, or QDRO, is used to divide certain retirement accounts like 401(k)s without triggering taxes and early withdrawal penalties. While generally non-taxable events, IRA transfers must be handled properly so the transfer doesn’t result in tax liabilities and penalties.
After these transfers, you will also want to update your beneficiaries to reflect your post-divorce wishes.
Investments
Dividing investments in a divorce can have significant tax implications that should be considered.
When investments are divided, the original purchase price, or cost basis, is transferred to the receiving spouse. This transfer is generally not taxed, and the receiving spouse assumes the cost basis and holding period. When the investment is sold, the spouse will be required to pay any capital gains between the cost and sale price, creating a potential tax liability at that time. Furthermore, the receiving spouse will be responsible for any taxes on dividends and interest earned.
What if a Trust Holds Marital Property or Investments?
Special rules may apply if marital property or investment accounts are held in a trust or as part of an inheritance. You will want to consult with your Florida divorce attorney or an estate planning attorney to help you understand and navigate this division.
Joint Business Interests
Dividing a family business must not only consider each spouse’s financial stakes but also the business’s operational stakes. There will be capital gains or gift taxes to consider, buyout agreements to create, and decisions to make about how the ongoing business operations will continue.
Given the complexity of dividing a family business, a Florida divorce attorney with significant experience in business valuations and complex asset division will be an essential ally.
Navigating the tax impact of your divorce will require understanding and careful planning. Being informed and proactive will help you better manage the overall financial impact of your divorce, avoid unnecessary tax liabilities, and ensure that you negotiate the best divorce settlement agreement possible.
At Melone Hatley, P.C., our experienced Tampa family law attorneys believe that educating our clients empowers them to make informed decisions. If you are facing a divorce or other family law issue, let our experienced attorneys work for you. Call us at (813) 576-2145 or contact us online to start planning and protecting your future.
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