Divorce can affect a large number of tax considerations

Massachusetts couples know that the Internal Revenue Code distinguishes between those who are married and those who are not. It should come as little surprise that a divorce can have significant tax implications. What can be surprising, however, is the extent of a divorce’s effect on one’s taxes. With the filing deadline approximately one month away, it is important to consider some tax areas affected by a divorce.

For couples undergoing property division in a high asset divorce, capital gains taxes will likely come into play. A divorce settlement may specify that one spouse gets a house while the other gets, for example, a portfolio of stocks. That initial division is a non-taxable event, but taxes must be paid when the person sells the house or portfolio. A calculation of the tax owed will include the item’s cost basis, its sale price and any applicable exclusions.

In addition to property division, a divorce often includes alimony and child support payments. Each of these receives different treatment under the tax laws. Alimony qualifies as a tax deduction for the person paying it, but the person receiving it must pay taxes on it. By contrast, child support payments are not income for tax purposes, nor can they serve as a deduction.

It seems obvious that a divorce will affect a former couple’s filing status, but there are a variety of rules regarding the change in status. A person’s filing status depends on the couple’s marital status on the final day of the tax year, regardless of when the divorce actually took place. Marital status in turn rests on state law. A divorced person can claim the beneficial head of household filing status if he or she meets particular criteria.

Source: Forbes, “Tax Tips for Women Going Through Divorce,” Jeff Landers, Mar. 7, 2012.

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