Tax Talk: How Your Divorce Settlement May Affect Your Finances

Here comes that time of year again–the annual countdown to Tax Day. This yearly accounting of income and expenses has different implications for everyone, but can become especially complex and confusing when also combined with divorce settlements.

As divorce lawyers in Cleveland, Ohio, the team at Law Offices Of Cara L. Santosuosso, LLC knows that understanding is empowerment and also a great advantage when it comes to adjusting to a post-divorce life. That is why we are happy to share what we know about divorce and taxes, in hopes that this information can help to ease worry and confusion. 

What Are Divorce Settlements?

Divorce settlement agreements are known by many names, such as:

• marital settlement agreements
• marital termination agreements
• separation agreements
• stipulations of settlements
• property settlement agreement

Call them what you will, they all refer to written contracts between divorcing spouses. These agreements outline each party’s responsibilities and rights following the divorce. Once formed, agreed to, submitted to the court and signed by a judge, divorce settlement agreements are legally binding and are typically incorporated into the final divorce decree. Typical inclusions are child custody and child visitation arrangements, child and spousal support, and division of property, debts and assets.

While collaborative divorce and mediation employ very different methods from a divorce case that ends in a court trial, it still stands that any type of divorce will need a court-signed divorce decree finalizing the terms of the divorce. For one thing, the court needs to ensure that any children’s best interests are served by support, custody and visitation arrangements.

Tax Implications of Divorce Settlements

Knowing how alimony, property division, and support payments affect taxes can help those in the midst of divorce to anticipate financial outcomes down the line. For one thing, divorce changes how you file your taxes. Instead of “married filing jointly,” you may now file as “single” or “head of household.” This one change can easily impact your tax bracket, permissible deductions, eligibility for credits and more. Just remember that marital status on December 31 of the tax year in question will determine how you file. However, there is more to know when it comes to filing for taxes post-divorce. Here is a breakdown of everything you need to know when facing tax season after divorce or dissolution in Ohio.

Alimony/Spousal Support and Taxes

Monthly or lump-sum payments can impact each spouse’s income and budgeting, but may not impact tax considerations. This is due to a major shift that took place in the late 2010s, known as the Tax Cuts and Jobs Act of 2017 (TCJA). 

According to this tax law change, couples with divorce agreements dated December 31, 2018 or earlier typically had to include alimony payments on their taxes. For the payor, this amount would have been deductible, for the recipient, it was required to be reported as taxable income. However, this all changed in 2019, and going forward, neither party to a divorce needed to include information about alimony payments on their federal income tax returns, as it is no longer considered to be either income or a deduction.

Property Division and Taxes

Marital property division can seriously impact each party’s financial situation, but not so much their tax filing. This is true, at least, on the front end of the agreement.

Typical property that may be divided in divorce can include:

• Homes or real estate
• Savings and investment accounts
• Retirement funds (401(k), pensions, IRAs)
• Businesses or business interests
• Vehicles and valuable property

Ohio is an "equitable distribution” state, meaning that unless it would be unfair, Ohio requires judges to divide a couple's marital property equally. There is no immediate tax impact for transferring assets between spouses during divorce if timing is carefully planned and all related guidelines are followed, such as a formal court order known as a Qualified Domestic Relations Order (QDRO). However the same can not be said down the line, should one individual decide to sell the property or, in the case of retirement funds, begin to withdraw. In the case of selling the marital home, the ex-spouse may face capital gains taxes on any appreciation. If they choose to withdraw from a retirement account, they may be subject to tax.

Support Payments and Taxes

Child support payments help to cover living expenses for a minor child or a child with special needs after divorce. These payments are tax-neutral, as in they are not taxable income for the receiving parent or a deduction for the paying parent. In general, parenting arrangements may affect who pays directly for healthcare, education, and childcare. The parent with primary, residential custody is typically able to claim any available child-related tax credits. That said, parents can work out special arrangements in their divorce settlement that may allow them to share available tax credits by claiming their child as a dependent during alternate years. Credits can also be assigned based on income levels. 

All of the details of how your specific divorce settlement will impact your tax filing both now and in the future can be worked out with an experienced child custody attorney, and with the help of a financial advisor. Your trusted divorce attorney will also be able to help you discover easily overlooked assets, account for digital assets, and navigate both high asset cases and divorce that involves a business.

Collaborative Divorce Lawyers In Cleveland, Ohio

Divorce allows you to turn the page and start a new chapter in your life. However, it can have some real-life implications for your financial future and bring up many tax-related questions. From determining who will keep the house and car, to who will have primary custody of children and pets, divorces today are often more complex than they used to be. Changes in tax laws can also impact how you file. With reliable legal guidance from a trusted divorce lawyer in Cleveland, you can rest assured that your rights and well-being are advocated for and marital assets are handled fairly and equitably, with an eye on your future.

If you are facing divorce and have questions about how it will impact future tax filings, the expert legal team at the Law Offices Of Cara L. Santosuosso, LLC can help. Divorce can be tricky to navigate, so speaking with an experienced Cleveland divorce attorney is a good place to start. Contact us today to learn more or schedule your consultation online.