Americans ages 40 and older are at an ever-increasing risk of divorce. From 1990 through 2015, the incidence of divorce rose 14% among those aged 40 to 49—and a whopping 109% among those 50 and older—according to the Pew Research Center.1
Beyond the emotional toll of divorce, there’s the challenge of divvying up marital property. Although many couples do so on the basis of fair-market value, that may not be the best approach. “Two assets of similar value can be taxed very differently, making one worth substantially less than the other,” says Marianne Hayes, a Schwab wealth strategist.
For example, investments liquidated from brokerage accounts may be subject to capital gains taxes, while those transferred from Individual Retirement Accounts and 401(k)s often retain their tax-advantaged status (so long as the divorce decree specifies their division and they are rolled into similarly tax-advantaged accounts). “Make sure you review the tax status of each asset individually,” Marianne says.
Beyond the division of assets, she suggests considering how the following may affect your post-divorce tax bill:
- Dependent exemption: The custodial parent typically receives this exemption, though the IRS allows the noncustodial parent to claim the tax deduction—worth $4,050 per qualifying child in 2017—under certain conditions. Bear in mind, however, that the value of the exemption is reduced by 2% for each $2,500 above $287,650 in income, up to $410,150, at which point it phases out completely.
- Alimony: Although it’s deemed taxable income by the person who receives it, it is tax-deductible by the person who pays it (provided the payments are laid out in the divorce decree and disbursed in cash or by check).
- Tax withholding: Alimony is generally not subject to tax withholding, so recipients may need to consult a tax advisor about the best way to satisfy the resulting tax liability. In addition, you’ll no longer be eligible for the tax benefits conferred upon married couples, so be sure to revisit your W-4 after the divorce is finalized to ensure enough taxes will be withheld from your paycheck.
Robert Aruldoss, a senior financial planning analyst at the Schwab Center for Financial Research, also suggests consulting a tax attorney as part of the divorce process. “The tax implications of divorce can be quite consequential,” he says, “but enlisting a professional can help ensure each party gets a fair shake.”
The bottom line: Make sure you understand how your new marital status could affect your tax bill.
1Renee Stepler, “Led by Baby Boomers, Divorce Rates Climb for America’s 50+ Population,” 03/09/2017.