Divorce & Taxes – Five Things to Consider
Mar 5, 2025 | Written by: | Share
A few years ago, I wrote a blog entitled “Taxes & Divorce: Ten Tips to Consider.” Those tips are still relevant when going through a divorce, but below are five additional tips that should also be considered.
- Ask an expert! Unless your attorney is a CPA and/or has an LLM in tax law, you should not be relying on your divorce lawyer for tax advice. Rather, both you and your spouse should engage a professional tax expert to assist with decisions relating to your divorce that may have tax consequences, and to help determine how a settlement of certain issues in your case will affect your tax liability, if at all. For example, is your primary home or secondary home subject to capital gains if it is being sold incident to a divorce, and who will be responsible for what portion of same? Do you have carryover losses that can be shared, and how?
- Fact check! Is a spouse in a divorce self-employed? If so, how is the business formed? Does the other spouse have any formal (or informal) connection to said business? Is any aspect of the business in joint names, such as a bank account? Has the business been claimed on personal tax returns, and were those jointly filed tax returns? These questions are critically important for your divorce attorney to ask and understand, as the answers to these questions may significantly impact not only liabilities, but also equitable distribution, support, and so on.
- Do we have to file jointly? Clients in the midst of a divorce often ask whether they should file jointly, and whether they are required to do so. First, see #1 above. Second, why? Is there a real and genuine reason that you believe same is necessary and worth the time and expense of additional work with your divorce attorney? Sometimes this is actually true and necessary, such as one spouse liquidated retirement assets (perhaps unknowingly) and there is significant tax liability owed. There are a myriad of different reasons and possibilities, but it is not always a simple answer and conclusion. You should consult your divorce attorney first, and then your CPA to understand the pros/cons of filing separately while still married. You should have a frank discussion about the costs of an interim order and agreement that will need to be reached addressing the issues that flow from separate filings, including but not limited to who claims the house deductions and children, and was any liability created for one spouse by the separate filing of the other? Actions have consequences, and some are greater than others. Understand the consequences first, not after. Damage control is often an expensive undertaking!
- Who gets to claim the children? It depends on the negotiated terms of your agreement and your economic situation. While it may be somewhat normal or customary to share (or alternate) deductions relating to the children, that should not be a formulaic answer. For example, are you making the claiming of a child by a noncustodial parent contingent upon the payment of child support, and no arrears? If AMT is resurrected by the government, or a parent makes an income above a certain threshold, will that make claiming a child irrelevant or even impermissible? There are many facets to this question that should be considered by you, your attorney, and your tax expert.
- Indemnify! If you are advised to sign a joint tax return and/or you are concerned about future tax liability from filings made during your marriage, ask whether an indemnification agreement is appropriate for you BEFORE you sign or agree to file jointly[1]. And lastly, depending on the concerns, exposure, and liability, consider retaining a tax attorney to advice on these aspects of a complex divorce.
[1] Here is a prior blog about innocent spouse that is tangentially relevant and helpful to this issue: https://www.gklegal.com/blog/divorce-tax-liability-and-innocent-spouse-relief/
Diana N. Fredericks, Esq., devotes her practice solely to family law matters. She is a Certified Matrimonial Law Attorney and was named to the NJ Super Lawyers Rising Stars list in the practice of family law by Thomson Reuters from 2015 through 2021, to the NJ Super Lawyers list in 2023 and 2024, and to the New Leaders of the Bar list by the New Jersey Law Journal in 2015. Contact Ms. Fredericks for a consultation at 908-735-5161 or via email.
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Any statements made herein are solely for informational purposes only and should not be relied upon or construed as legal advice.