Separating Or Divorcing In NC? Don’t Forget These Tax Considerations!

Separating Or Divorcing In NC? Don't Forget These Tax Considerations!

Diving into divorce can often feel confusing and time-consuming, with worries about untangling finances and assets looming large.  It’s all too easy to focus on the big decisions and overlook the smaller details that can have a lasting impact. Cue the often-overlooked yet crucial topic of taxes.

As you navigate through this life-changing transition, understanding how your taxes will shift is vital. From deciding on your filing status to figuring out who gets to claim the kids to joint tax liabilities and splitting retirement accounts—not to mention keeping up with the ever-evolving tax laws—there’s a lot to consider. We want to shed some light on these areas, helping you to make informed choices that could significantly impact your financial well-being post-divorce

Filing Status During and After Divorce

It’s important to remember that couples who are still married at the end of the calendar year are still considered married for that year when filing. For example, if you were married as of December 31st, 2023, but divorced in January or February of 2024, you would still be considered married for tax purposes, and you could not file as a single person for your 2023 taxes. You might be able to file as Head of Household if you have children and have been separated for more than six months, but more on that later. Determining your filing status should be the first thing that you do. The IRS encourages divorced or newly separated couples to consider the following options:

  • Married filing jointly – Divorced or newly separated couples report their combined income and deduct allowable expenses. This can result in a lesser amount owed for some than if they filed separately. This option usually saves spouses money.

It’s important to recognize that in most situations, filing jointly means joint liability. There are instances where it may not be in your best interest to file jointly. For example, if your spouse didn’t have enough withheld from their paycheck, or if you had enough paid in as estimated but they didn’t, you could end up owing more money at no fault of your own. And if you believe your spouse is committing tax fraud or evasion, DO NOT file a joint return.

  • Married filing separately—Divorced or newly separated couples file separately, reporting their own income, deductions, and credits individually. This makes each spouse responsible for their own taxes. Typically, this results in each of you paying more in taxes than if you had filed a joint return.
  • Head of household – Some may be eligible to file head of household if all of the following apply:
    • Their spouse didn’t live in their home for the last six months of the year.
    • They paid more than half the cost of keeping up their home for the year.
    • Their home was the main home of their dependent child for more than half the year.

Even if you and your soon-to-be ex-spouse may have established an arrangement, even if you have a court order that says who is supposed to pay the taxes, if there are issues, the IRS does not care. They will go after whoever’s name is signed on the tax return.

Be smart when filing taxes; you don’t want to be on the hook for your ex’s tax mess years later because you want to save a few bucks.  Having a good family law attorney coupled with an experienced tax professional on your side will make this decision easier, as they can give you guidance on what the best option is for you and your unique situation.

Claiming Dependents As A Divorced Couple

Who claims a dependent is another tax consideration that can’t be overlooked. The IRS states that only one parent can claim the tax benefits related to a dependent child who meets the qualifying child rules. You need to be in communication with your ex about this, as both parents can’t claim their child as a dependent. If this happens, it can substantially slow down the process as the IRS will have to determine which claim will take priority. And likely, the IRS will flag both returns and may even conduct an audit.

The IRS decides who can claim a dependent by looking at the number of overnights a child spends with each parent. Being the custodial parent means you have primary custody and that your child spends the majority of their time with you. Generally, the custodial parent claims the qualifying child as their dependent. Even if you share 50/50 custody, it is rare for the IRS to recognize that, as each year (aside from leap years) has an odd amount of days, and therefore, custody is never perfectly even However, in the event that the number of overnight stays is equal for both parents, the custodial parent would be considered the parent with the higher adjusted gross income. 

You can agree to shift who gets to claim the child yearly or divide dependency exemptions. There is no one-size-fits-all remedy. The goal here is to pay less to Uncle Sam and put more funds into the family unit. For instance, if you have no earned income, it doesn’t make economic sense most of the time to claim a dependent when the other parent could get a tax benefit from it and have more funds to help support the family unit.

As a general rule of thumb, coming to an agreement with your ex-spouse about who will claim a child (or children) is the best way to keep an already complicated process as smooth as possible and avoid conflicts down the road. A skilled divorce attorney can help you determine what makes the most sense for your family. Every family is unique, so having professional assistance from not only a lawyer but possibly even a tax specialist, a paid preparer, or a CPA can help maximize the benefits for your family.

Dealing With Tax Debt During Divorce

If you failed to file your taxes for a period of time or filed but did not pay your taxes, this can result in a huge debt that must be dealt with in your divorce and equitable distribution court orders. Again, if it is a joint debt liability, the IRS will not care if your ex-spouse agreed to pay and didn’t. You are still on the hook! North Carolina’s Department of Revenue is particularly aggressive in getting the money they’re due however they can, even if that means levying bank accounts or putting a lien on your real estate, reducing the equity you have in your home.

At Triangle Smart Divorce, we work locally with several professionals who can help mitigate tax bills or get penalties and interest waived or reduced. We offer you a judgment-free zone. If you haven’t paid your taxes and you’re getting ready to go through a divorce, that is something that must be squared away, and we can help you do that.

Going forward, you may want to consider adjusting your withholding so that you don’t have a larger tax bill at the end of the year. A tax specialist, a paid preparer, or a CPA can help you complete a new W4 and your NC4 so that you’re prepared with the proper withholdings and paying the correct amount. If you are not a W2 employee and are a business owner or a 1099 employee, a professional can help you decide what the estimated amount should be paid so you can avoid interest and penalties.

Alimony Tax Law Changes, Retirement, Asset Transfers, And More

Due to the  2017 Tax Cuts and Jobs Act, after January 1, 2019, alimony that is by agreement or court order is no longer taxable to the recipient and tax-deductible to the payor. This means that what you pay or receive in alimony will be exactly that, without having to figure in additional tax rates.

When you start dividing your financial accounts, know that transfers between spouses pursuant to IRS Provision 1041 are (in most cases) tax-free. However, if you cash in an asset, you are going to pay tax on that. For example, if during your divorce, retirement is divided according to an agreement or court order, when you cash in that retirement, if it was pre-tax money put into the retirement account (like a traditional 401k), you are going to pay taxes on the withdrawal. You may even have to pay a penalty if you are under age 59½.

It’s the same with the house – if you get the house in the divorce, that is not a taxable event. However, when you sell the house, if you have capital gains in excess of the capital gains exclusion on a primary residence ($250,000 for a single person, $500,000 for a married couple), and you’ve lived there two out of the last five years, then you are going to pay tax on those gains.

At the end of the day, getting divorced is not going to get rid of your taxes. You are still going to owe taxes on what you’re supposed to owe taxes on, but consulting with the right professionals can give you the peace of mind that you won’t have any unexpected tax bills pop up in the future.

How Triangle Smart Divorce Can Help You

At Triangle Smart Divorce, we don’t want to see you spend time, money, and energy getting divorce matters resolved, only for a creditor to come knocking at your door to take away everything you negotiated so hard for because you weren’t proactive with your taxes. We will help you address these discussed tax considerations now to avoid hassle later. Call Triangle Smart Divorce today to request a consultation and learn about your next steps.