I know firsthand how the end of a marriage can prove a difficult time for any woman, both personally and financially. As you’re adjusting to your new lifestyle, it is important to consider how your tax obligations might change as a result.
When you are going through a divorce, there are a variety of financial factors that can impact your taxes. For example, you may be deciding to sell your home, a car, or you have changed your filing status and you want to know how it will affect your income.
If you are feeling anxious about your tax obligations in Arizona following your divorce, rest assured that help is available. Working with a Certified Public Accountant (CPA) and/ or Certified Financial Planner™ (CFP®) professional, you can develop a tax planning strategy to prepare for your future with confidence.
Important Post-Divorce Tax Planning Considerations
Change in Filing Status
One of the most significant changes that will occur after your divorce is finalized is your filing status. If you were previously married and filed taxes as “married filing jointly,” you will now have to file as “single” or “head of household.” This change in filing status can impact your income taxes, so it is important to be aware of the implications.
For example, if your child spends over 50% of the year with you and you file as head of household, you may be able to take advantage of the more favorable tax brackets. Depending on your divorce agreement, you may also be able to claim them as a dependent on your tax return. This can provide some significant tax benefits as well.
Changes in Income and Deductions
Other factors that will influence your tax obligations following your divorce are your income and deductions. After the dissolution of your marriage, you might find yourself in a different tax bracket if, for example, you are adjusting to a lower income, starting a new job, take a distribution from a retirement account, or sell your home.
Be sure to keep track of all of these changes so that you can accurately report your income and deductions on your tax return. As a CPA, I often help divorced women with tax planning and preparing their tax filings to ensure that all information is reported correctly.
If you have children, your divorce agreement should stipulate which parent can claim which child as a dependent in which tax years. While there is no longer a federal dependency exemption, certain tax credits can only be claimed by the parent who claims the child as their dependent.
There are other considerations when it comes to claiming dependents as well. For example, if your former spouse claims the children as dependents on their tax return, you may not be able to claim them as your own dependents. While the IRS will respect a divorce decree to determine dependency status, if it is silent, a child is considered the dependent of the parent with whom the child spends over 50% of the year. If the time is equally split, the parent who makes the largest financial contribution is awarded the dependent.
Alimony and Child Support Payments
As of 2019, alimony is no longer taxable for federal or in Arizona for divorces settled after that year. However, for any settlements concluded in 2018 or earlier, alimony is treated as both taxable to the recipient and tax-deductible for the person making the payments. Child support is neither taxable nor deductible.
Division and Sale of Assets
The division of assets is a major consideration during a divorce settlement. If you are awarded appreciating assets and sell them in the future, you may owe taxes on them.
Some typical assets that might be divided or transferred during a divorce could include:
- Real estate
- High-value art
- High-end jewelry, clothing, or accessories
- Stock portfolios, retirement accounts, etc.
- Physical investments – gold, silver, etc.
For example, if you are awarded the marital house and decide to sell it in five years, you may have to pay capital gains tax on a portion of the profit. For federal tax and in Arizona, any gain over $250,000 (single or head of household) or $500,000 (married filing jointly) is taxed at the capital gain rate. The other requirements for excluding the sale are that you must have owned and lived in the home for two of the last five years and that you haven’t excluded the gain on the sale of another home in the last two years.
Consulting with a CPA and CFP® professional like me before selling a high-value asset can help you avoid unnecessary taxes. I can assist you with strategies to minimize your tax liability related to divorce.
How an Arizona CPA and CFP® Professional Can Help You with Tax Planning After Divorce
At Bridge Divorce Strategies, we are committed to helping women facing divorce in Arizona, and their attorneys, create effective financial strategies before, during, and after divorce settlements. I want to help you begin your new lifestyle with the confidence and peace of mind that come with a sound, actionable financial plan.
To learn more about how we can assist you, contact us today.