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Tax Implications for Newly Divorced Couples

— February 15, 2024

Tax considerations are especially complex, especially if you and your ex have children. 

Getting divorced in New York can change your life in various ways. Some of these ways are obvious, like living in a different home or only seeing your children according to a set schedule. But your divorce can also impact you in ways you may not expect, such as when it comes to your taxes.

A divorce means more than just changing your filing status from married to single. Your tax bracket, obligation, and eligibility for credits and deductions on your federal and state returns are also at stake. For newly divorced couples in New York, it’s vital to prepare for these tax implications in advance.

General Tax Implications of Divorce

Having a court grant your divorce means you can no longer file your taxes using the married filing jointly status. The IRS considers whether you are married or single depending on your divorce status as of December 31st, so if you are divorced at any time during the tax year your status will change. This takes away the larger standard deduction that married couples enjoy. Not having your spouse’s income considered part of your return will also affect your taxable income and could impact the tax bracket in which you fall.

Transferring some assets from one spouse to another as part of the court’s property division orders doesn’t always result in tax consequences. However, transfers of pensions, IRAs, and other similar assets might create a tax liability for you or your ex-spouse, if not done properly or if done in a way to liquidate or cash out retirement assets, which should be considered.

Tax Credits Overview

Tax credits and tax deductions reduce the taxes you pay. A tax deduction reduces your taxable income, whereas a credit reduces the amount of tax you owe. Certain tax credits can be impacted by your divorce, including the earned income tax credit (EITC) and other refundable or partially refundable credits.

EITC eligibility requires that you have a qualifying child and pay at least half the costs of maintaining your household during the year. Your divorce may also impact your child tax credit (CTC) and the child and dependent care credit (CDCC).

Tax Credits for Children in Divorce Situations

The custodial parent can claim many tax credits relating to having children. This includes being able to file as head of household and receiving a more generous standard deduction. 

The CTC covers qualifying dependent children under age 17. Because only one parent can claim a child as a dependent, you may no longer be eligible for this credit if you are not the custodial parent after a divorce. A divorce agreement may provide for a non-custodial parent to claim the credit in every year or alternating years.

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Similarly, the CDCC is meant to help parents who pay for childcare expenses to recover some of those expenses. To qualify for this credit as a custodial parent, you must pay for childcare expenses while you work or search for employment. 

As a non-custodial parent, you can claim this credit if you meet the eligibility requirements and claim a child as a dependent on your income tax.

Tax Considerations Specific to New York

If you divorce in New York, there are state-specific tax rules that a divorce can trigger. For example, if you pay alimony to your ex, this amount is tax deductible and must be counted as income by your spouse. Alimony used to be taxable at the Federal level but is not any longer, so it may be important to consider whether or not New York taxes should be considered when determining alimony. However, child support is not deductible and is not considered income.

Additionally, one parent can claim a child as a dependent per year and receive a tax credit. With more than one child, each parent may be able to claim one or more of the children.

Get Professional Assistance and Advice

Divorces in New York can quickly become complicated and impact your life and finances in many ways. Tax considerations are especially complex, especially if you and your ex have children. 

Consulting a tax professional and a skilled family law attorney is essential to protecting your interests. With the right advocates on your team, you can successfully navigate the tax complexities of a New York divorce.

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