How Does Divorce Affect Taxes in Tennessee?

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

If you get divorced in Tennessee, your tax status will change. If you sell any property as part of your divorce, you may have to pay additional taxes. 

Alimony may or may not have tax implications for you; it depends on when your divorce was finalized. If you have retirement accounts, keep in mind that you would typically only pay taxes on the money you receive. Money going to your ex-spouse is that person’s income, not yours.

Divorce can impact your Tennessee tax status

A divorce will impact your tax status the year it is finalized. If you are getting a divorce but are still married by the end of the year, you will still file as married. This is true even if your marriage is obviously in an irreparable state. 

Once your divorce is finalized, assuming you don’t get remarried that same year, your tax status will likely change from married to single. This typically has negative tax implications. However, some individuals may be able to claim the head of household status, which is typically more beneficial than the single status. A person may qualify as head of the household if they pay the majority of their household expenses and care for a dependent. 

The IRS offers a free tool to help you identify your tax status if you’re unsure what it might be.

Tax implications on alimony or spousal support

The Tax Cuts and Jobs Act of 2017 (TCJA) overhauled tax law, changing the tax implications for alimony in terms of both paying and receiving it.

In the past, paid alimony was considered to be tax deductible, reducing one’s tax burden if they needed to pay it. Received alimony was considered to be taxable income.

The TCJA changed this. Now, a divorce finalized after December 31, 2018, has different alimony rules. The payer can no longer claim the payments as tax deductions. Meanwhile, the receiver doesn’t have to treat the money received as taxable income. 

It’s also possible for a divorce finalized before this cutoff to be modified so the new rules apply. This is something many alimony recipients aim for if negotiating, as this change would benefit them.

Tax considerations for division of property

The division of marital property and debt doesn’t have direct tax implications. That's because it isn’t income.

When you divide your marital assets, you decide what should go to whom. Your division may have significant financial implications in terms of the wealth you can access, but that doesn’t mean it will impact your taxes.

However, the sale of marital or individual property could lead to a capital gain, which is a profit made on the sale of an asset. This is very common when a couple has a large property (like a house) that they sell because of divorce.

Splitting property can be complicated. Often, it is sold, and the money from the sale is split. Assuming the sale garnered a profit, you may need to pay capital gains taxes on your share of the profit. 

You may be eligible for an exclusion

Exceptions exist if you are selling a family home that was lived in and owned for a long enough period. There is a maximum exclusion of gain of $250,000, or $500,000 if married filing jointly, on capital gains from eligible sales of this type. The IRS has a guide you can follow to see if you might qualify (including whether you might qualify for a partial exclusion).

Are there tax implications on child support in Tennessee?

Paying or receiving child support doesn’t have tax implications in Tennessee or elsewhere in the U.S. 

While this is a matter of some debate, the general justification for this is that child support, as the name implies, is to provide one’s child with the support they need. The custodial parent supports the child with their time and resources. The non-custodial parent is thus obligated to offset the resources it takes to raise a child through financial child support.

It would arguably be strange if a person who received child support had to pay taxes on the amount they received, considering a judge set the amount with the intention it was what the child ought to fairly receive in support from their other parent. 

Taxes and retirement accounts

A divorce can have a significant impact on retirement accounts like 401(k)s and IRAs. Imagine these accounts as investments. A party pays money into these accounts periodically. When enough time has passed, you can begin to theoretically pull from these accounts at a profit. 

What is less obvious is that the money flowing into a retirement account isn’t always solely yours. If you are married, payments made into these accounts will usually be with what is considered marital (shared) property. 

Why this matters for a Tennessee divorce

Most retirement accounts of individuals who were divorced have some money paid into them while they were single and some money paid into them while they were married. This distinction matters. 

This is akin to having shares in a company. Paying into the retirement fund when single was like buying shares solely for yourself. Paying into the fund while married was like buying shares for yourself and your spouse.

Once divorced, your spouse will be owed a portion of your retirement payout, assuming you don’t have a settlement that states otherwise. The amount depends on various factors unique to your situation, but your ex only has a partial claim to the “shares” paid into the account with marital property. 

References