How Does Divorce Affect Taxes in California?

• Divorce can impact your California tax status
• Tax implications on spousal support (alimony)
• Tax considerations for division of property
• Are there tax implications for child support?
• Taxes and retirement accounts
• References

Divorce could affect a California resident’s taxes in several ways. For one, your filing status will change to single. And, depending on when you divorced, there may or may not be tax implications relating to spousal support payments. 

One area that can result in significant unexpected taxation is the sale of assets during the split of communal property. The sale of a bigger asset, like a house, could cause you to be affected by capital gains taxes in a way you wouldn’t normally need to worry about.

Divorce can impact your California tax status

More than likely than not, a divorce will significantly impact your taxes. If you were married or in a registered domestic partnership (RDP), you may have filed your taxes jointly with your partner and benefited from a lower tax rate and better standard deduction than you will receive now that your filing status has changed to single.

In the State of California, a person’s filing status is considered single if they meet the following criteria:

• Unmarried and not in an RDP
• Legally separated from their partner
• Had a registered domestic partnership terminated
• Divorced under a final decree of:
  • Divorce
  • Legal separation
• Widowed before January 1st of the year you’re filing (and didn’t remarry or enter into an RDP that year)

As a rule, the IRS states that you must file as single “unless you're eligible to file as head of household or you remarry by the end of the year.” So, if you have separated from your partner but are not legally separated or divorced by the end of that year, you still will generally file as married until you get a final decree of divorce or separate maintenance.

Click to learn more about legal separation in California.

Tax implications on spousal support (alimony)

In the past, it was often possible to deduct spousal support payments from your taxes. A person receiving these payments would also have to report these payments as taxable income. For people whose divorces were finalized before January 1, 2019, this typically remains true even if the specifics of the divorce were modified at a point after that date.

However, couples whose divorce details are finalized after January 1, 2019,  fall under the regulations set by the Tax Cuts and Jobs Act of 2017 (and some parts of that law affect divorces even farther back). This act fundamentally changes many aspects of how divorce can or cannot affect your taxes, with older divorces getting grandfathered in under the older regulations (hence the cutoff date). 

One major difference affecting divorces finalized after January 1, 2019, is that paying spousal support or alimony doesn’t allow you to get any tax deductions related to those payments. And, receiving alimony doesn’t count as receiving taxable income. 

Read: How 2017’s Tax Bill Changed How Alimony Is Taxed

Tax considerations for division of property

In a marriage, assets and debts acquired are typically considered community property. Thus, in the event of a divorce, assets and debts need to be split accordingly. This can significantly affect a person’s taxes for the year, especially if properties are sold as part of the divorce. 

Capital gains

This is one of the most complicated areas of tax law, and you may want to speak with a financial or legal expert if you need to divide a large amount of property. Keep in mind that the sale of assets falls under capital gains law, which has the potential to represent a significant tax burden in the upper brackets. 

The sale of an asset you’ve held for 12 months or less counts as a short-term capital gain. Short-term capital gains are typically treated like ordinary income.

Profits you make from unloading an asset you’ve held for at least a year are considered long-term capital gains. In general, the majority of taxpayers don’t pay more than 15% on such profits, but some taxpayers may need to pay as much as 20%. In many cases, a person may actually owe less in taxes, depending on the specifics of their capital gains for that year.

Tax exclusions

Note that major tax exclusions are often available for those who sell a home they owned and used for at least two out of five years prior to the sale. California conforms to the IRS rules regarding this exclusion. On both a state and federal level, the sale of such a home allows for $250,000 for individuals or $500,000 for couples (including divorcing but not currently divorced couples). 

Are there tax implications for child support?

Child support payments don’t typically affect your taxes. As mentioned previously, you cannot write off these payments as deductions unless your divorce occurred before 2019. Further, the money does not count as income to the person receiving child support payments.

It’s still important to understand your legal rights and obligations regarding child support payments. You should especially understand under what circumstances your obligations could change and what to do if you could not make a payment.

Taxes and retirement accounts

Divorce can have significant tax implications for retirement accounts like 401ks and IRAs. This is a fairly complex area of divorce law, but the idea is generally that payments made into pension plans or retirement plans are community property. Generally, each party is entitled to part of the benefits of those plans in the event of a divorce. 

Under California law, unless you and the other party agree to a different arrangement, both parties own community property equally, so it typically needs to be split equally. This typically means a roughly 50/50 split of retirement accounts. 

However, a retirement account can be composed of both separate property and community property if a spouse paid into the plan before they got married (or after their marriage) and also paid into it while married. 

Suggested: QDROS: Dividing Retirement Plans in Divorce

References