Tax considerations during, after divorce

By Andrew Zashin

Though the April 15 tax filing deadline is now behind us, we know that it will come again. With that in mind, and while the matter is still top of mind, let’s discuss important tax issues that may impact your filings next year. I have previously discussed child-related tax benefits available to divorcing parents and the importance of allocating which parent claims the children in a final divorce decree and the potential tax win-win of contributing to a donor advised fund. There are also a variety of other tax-related items that individuals should consider both during and after a divorce.

Many individuals ask about the tax impact of child support, spousal support and property transferred pursuant to a divorce. Payments of child support are non-taxable transfers: the payments are not deductible to the payor (the person paying support) and are not taxable to the payee (the person receiving support). Payments of spousal support under orders issued after 2019 are similarly nontaxable transfers. Likewise, there is usually no taxable impact on property transferred between spouses, or former spouses, pursuant to a divorce.

During the divorce process, couples must decide how they are going to file their tax returns. If a couple is divorced by Dec. 31 of any given year, they must file separate income tax returns as single or head of household filers. If a couple remains married on Dec. 31, however, they must file under married filing jointly or married filing separately status. While I encourage everyone going through a divorce to consult with their accountant or tax professional to identify the tax-filing status that is best for them, the “rule of thumb” is for divorcing couples to file in the manner that maximizes total refund or minimizes total liability. The IRS also recommends that individuals going through a divorce file new Form W-4s with their employer to update their withholding amounts to reflect their anticipated filing status and number of dependents that they intend to claim.

After a divorce, the Internal Revenue Service may contact individuals to collect taxes due from returns that parties jointly filed during the marriage. If one spouse did not know that the other spouse improperly reported income, claimed improper deductions, or otherwise misrepresented tax information without their knowledge or consent, however, they may qualify for innocent spouse relief and be shielded from liability regarding all or some of the amount due. To qualify for innocent spouse relief, the requesting spouse must meet certain criteria and must demonstrate that the: (1) tax understatement was due to the other spouse; and, (2) requesting spouse did not know, nor did they have reason to know, of the understatement. Additionally, the requesting spouse must show that it would be unfair to hold them responsible for the liability.

There are three types of innocent spouse relief available: traditional relief, which provides full relief from additional taxes owed; separation of liability, which allocates additional taxes owed between the spouses; and, equitable relief, which may apply when neither of the foregoing apply. Innocent spouse relief can be requested at any time after a joint return has been filed, however, there are specific time limits for each type of relief. To support an innocent spouse relief claim, the requesting spouse may need to provide documentation and evidence to demonstrate their lack of knowledge or involvement in the tax issue. This can include financial records, communications between spouses, and any other relevant information.

These are just a few of the tax-related items that individuals should consider when going through, or after, a divorce. As always, I encourage individuals to consult with an accountant or a tax professional to discuss the above and other tax considerations that may apply to their specific situation.

This article originally appeared as a column for the Cleveland Jewish News.