Will You Need to Pay Taxes on Your Divorce Settlement?
- Is alimony tax-deductible?
- Do I have to pay tax on a property transfer?
- How can I minimize capital gains taxes?
Divorce can be a stressful and emotionally draining process. Amid the turmoil, it's easy for divorcing couples to overlook the tax consequences that may arise as a result of your separation. One significant concern that often plagues people going through a divorce is their taxes.
What are the tax implications of your divorce settlement?
Is the alimony I pay tax-deductible?
Before 2018, alimony payments made by one spouse to another were tax-deductible for the payer and taxable income for the recipient. However, with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, the tax treatment of alimony has changed significantly.
For divorce agreements executed or modified after the end of the year on December 31, 2017, alimony payments are no longer tax-deductible for the payer, and the recipient does not have to report them as taxable income.
This change means that the payer will no longer receive a tax break, potentially making alimony payments more expensive. On the other hand, the recipient will not have to worry about paying taxes on the alimony received.
It's important to note that this change only applies to divorce agreements executed or modified after December 31, 2017. If your divorce agreement was finalized before this date, the previous tax rules still apply.
Is the alimony I received from my ex taxable?
As mentioned earlier, if your divorce agreement was executed or modified after December 31, 2017, alimony payments you receive from your ex-spouse are not considered taxable income. This means that you do not have to report alimony payments on your tax return, and you will not be taxed on the amount you receive.
However, if your divorce agreement was finalized before December 31, 2017, the alimony payments you receive are considered taxable income, and you must report them on your tax return. In this case, it's essential to keep accurate records of the payments received and consult with a tax professional to make sure you're reporting the income correctly.
Do I have to pay tax on a property transfer?
In general, property transfers between spouses as part of a divorce settlement are not taxable events. According to the Internal Revenue Service (IRS), the transfer of property between spouses or former spouses incident to a divorce is not subject to income tax, gift tax, or capital gains tax. This tax-free treatment applies whether the property is transferred directly or through a trust.
While the transfer itself is not taxable, you may be subject to taxes when you eventually sell the property. The basis for determining capital gains or losses on the sale of the property remains the same as it was when you jointly owned the property.
Free download: Property Division Spreadsheet
How can I minimize my capital gains taxes?
Minimizing capital gains taxes following a divorce requires careful planning and consideration of various factors. Here are a few strategies to help reduce your potential capital gains tax liability.
Use the primary residence exclusion
If the property being transferred is your primary home, you may qualify for a capital gains tax exclusion when you sell the home. For single taxpayers, $250,000 or less of capital gains can be excluded. For married taxpayers filing jointly, that amount is $500,000.
To qualify for this exclusion, you must have lived at the address in question for two out of the five years before the sale.
Offset gains with losses
If you have other investments that have experienced losses, you can offset your capital gains by selling those investments and realizing the losses. This strategy can help reduce your overall tax liability.
Consider a 1031 exchange
If the property being transferred is an investment property, you may be able to defer capital gains taxes through a 1031 exchange. This involves selling the property and using the proceeds to purchase a new, "like-kind" investment property. Specific rules and timelines apply to this process, so it's crucial to consult a tax professional.
At Hello Divorce, we do more than offer affordable online divorce plans and services like attorney advice and mediation. To support you through the financial complexities of divorce, we also offer CDFA sessions with a Certified Divorce Financial Analyst, access to divorce coaching, and resources about post-divorce budgeting. Our goal is. to keep divorce accessible and affordable for everyone.