Tax Implications of a New York Divorce

January 30, 2024
Louis Sternberg

What Are the Tax Implications After a Divorce in New York?

Divorce can be a complex and emotionally challenging process, and one aspect that often gets overlooked amidst the emotional turmoil is the tax implications that it can have. The tax implications of a New York divorce, as in the rest of the United States, can be quite significant for both spouses. Here, we aim to shed light on some of the key tax implications after divorce in New York.

New York Divorce Tax Implications:

Filing Status: One of the most immediate changes that occurs after a divorce is a change in filing status for tax purposes. If you were previously married, you will now file as either “Single” or “Head of Household.” The choice of filing status can have a substantial impact on your tax liability. Generally, filing as “Head of Household” provides more favorable tax rates and deductions compared to filing as “Single.”

Child Support and Spousal Support: In New York, child support payments are not tax-deductible by the paying spouse, nor are they taxable income for the recipient. This is in contrast to alimony (also known as spousal support or maintenance), which can have tax implications. The 2017 Tax Cuts and Jobs Act (TCJA) had a significant impact on the tax consequences of alimony payments in New York State and across the United States. Prior to the TCJA, alimony payments were tax-deductible for the paying spouse and considered taxable income for the receiving spouse. However, the TCJA made several changes to the tax treatment of alimony, which took effect for divorce or separation agreements executed after December 31, 2018:

  • Elimination of Alimony Deduction: Under the TCJA, the paying spouse can no longer deduct alimony payments from their taxable income. This means that alimony payments are no longer tax-deductible for the payer.
  • Elimination of Taxation of Alimony: The receiving spouse no longer needs to report alimony payments as taxable income. Alimony received after the TCJA is generally tax-free.
  • These changes applied at the federal level, affecting taxpayers throughout the United States, including those in New York State.

However, it’s important to note that state tax laws can vary, and New York State also conformed to these federal tax changes, which means that they followed the same rules regarding the tax treatment of alimony payments.

Property Division: Divorce attorneys are frequently asked: is money from a divorce settlement taxable and what are the taxes on a divorce settlement? The division of marital property during a divorce can have tax consequences. The transfer of certain assets, such as real estate or investments, may trigger capital gains tax. However, New York law aims to minimize these tax implications by allowing for tax-free transfers between spouses as part of the divorce settlement.

Retirement Accounts: The division of retirement accounts, such as 401(k)s and IRAs, can be a complex matter. A Qualified Domestic Relations Order (QDRO) may be required to ensure that the division is tax-efficient and avoids early withdrawal penalties. The tax implications can vary depending on the type of retirement account and the specific circumstances of the divorce.  On the other hand, when one takes a withdrawal against such a retirement account (even if it is intended to satisfy an obligation to distribute such account), that withdrawal is generally taxable to the titled-spouse.

Tax Credits and Deductions: Divorcing couples should be aware of any tax credits and deductions they may be eligible for, such as the Child Tax Credit or the Earned Income Tax Credit. These credits can impact the amount of taxes owed or the refund received.

Dependency Exemptions: Deciding who gets to claim the children as dependents for tax purposes can be a significant issue in divorce cases. Generally, the custodial parent claims the dependency exemption. However, divorcing couples can negotiate and specify in their divorce agreement who gets to claim the children.

Medical Expenses: The payment of medical expenses can also have tax implications. If one spouse continues to provide health insurance for the other spouse or children, these premiums may be deductible. Additionally, out-of-pocket medical expenses may be deductible if they exceed a certain percentage of the taxpayer’s income.

Tax Liabilities: It’s essential to address any outstanding tax liabilities or joint tax returns during divorce negotiations. Spouses may be held jointly responsible for tax debts incurred during the marriage, even if the divorce decree assigns the responsibility to one spouse. Therefore, it’s crucial to ensure that any tax liabilities are properly accounted for in the divorce settlement.

Change in Residence: If one spouse relocates to another state after the divorce, they may need to consider the tax laws of the new state. Different states have varying tax rates and rules, which can impact the overall tax liability.

Legal Fees: Lastly, legal fees incurred during the divorce process are generally not tax-deductible. However, there are exceptions to this rule, particularly if the legal fees are related to tax advice or certain financial matters.

In conclusion, divorce in New York, like in any other state, can have significant tax implications that both spouses should be aware of and consider during the divorce process. It’s essential to consult with a qualified tax professional or attorney who specializes in divorce cases to navigate these complexities effectively. Understanding the tax implications can help divorcing couples make informed decisions and minimize potential tax burdens in the future.