Both marriage and divorce are significant life events, each of which can have implications on your taxes. Whether you are in the process of divorcing, considering divorce, or are fresh from a divorce, it is important to consider the effects your 2020 tax filing may have on your finances. This is even more important if you did not regularly prepare the taxes during your marriage. Today’s blog offers some common questions and answers we hear from clients around tax time.
How should you file taxes when getting divorced?
If you and your spouse have split up or are not yet divorced (or were not divorced at the end of 2020), you have two options – filing a joint return, or as married filing separately. This is true even if you are no longer living together. You may no longer file jointly or as married as of the year your Maryland divorce becomes finalized. So, if you were still married as of December 31, 2020, even if you are divorced now, you will file married.
If your divorce was final at the end of 2020, you can file as head of household on your tax return if you are paying for half the upkeep of your house, and/or have a dependent living with you for more than half the year. The Balance has more information regarding dependents and taxes. Your child custody arrangements should be laid out in your divorce agreement.
Am I responsible for my spouse’s tax debt?
In some cases. It depends on your filing status. Married couples can file their taxes either jointly or separately, which affects their liability regarding tax debt. Many spouses choose to file jointly, as the option offers a host of tax breaks. However, the downside of filing jointly is that if your spouse owes money to the IRS, so do you.
Do you get a tax deduction for paying alimony?
If you pay alimony to your ex-spouse, you can deduct that from your taxes – as long as your divorce was finalized prior to January 1, 2019. The alimony must be specified in a formalized divorce agreement. Conversely, if you meet those criteria, your ex-spouse is likely required to pay taxes on the spousal support. This does not hold true, however, for child support or for alimony awards after that date. It is not taxable and is not tax-deductible.
What’s the safest way to split retirement assets in our divorce?
Proceed carefully in order to avoid negative tax consequences. For example, during asset division, if one spouse cashes out their 401(k) to give to the other spouse, the IRS considers that money taxable. However, you can avoid this by using something called a Qualified Domestic Relations Order (QRDO). This gives you (or your spouse) the right to cash out funds from a 401(k) without the burden of taxes. IRAs, on the other hand, do not require a QRDO, but we do advise to specify the transfer in your divorce agreement to limit tax liability.
The divorce and family law attorneys at McCabe Russell, P.A. are here to answer any of your questions about the divorce process. Don’t hesitate to schedule a consultation with an experienced attorney at our family law firm by calling 443-917-3347 or reaching out to us through our contact form today. We maintain offices in Bethesda, Fulton, Columbia, and Rockville.
At McCabe Russell, PA, we have an established reputation as assertive and confident negotiators and litigators, offering legal guidance designed to eliminate any of our clients’ worries and confusion. We are experienced family law attorneys in Howard and Montgomery County, but we serve clients throughout Maryland. Read more about McCabe Russell, PA.