Maryland Divorce & Taxes

Getting divorced is tough enough without having to worry about taxes. But when you're going through a divorce in Maryland, understanding how it affects your taxes is really important. The decisions you make during your divorce can impact your wallet for years to come. This guide will help you understand everything you need to know about filing taxes during and after a Maryland divorce.

How Your Filing Status Changes

One of the first things that changes when you get divorced is how you file your taxes. The IRS looks at your marital status on December 31st of each year to determine how you should file. This is called your filing status, and it matters a lot because different filing statuses have different tax rates and deductions.

If your divorce is finalized before December 31st, you cannot file as "Married Filing Jointly" or "Married Filing Separately" for that year, even if you were married for most of it. Instead, you'll file as either "Single" or "Head of Household" if you qualify.

Here's something important to know: Maryland doesn't have legal separation like some other states do. So even if you've been living apart from your spouse for months, if you're still legally married on December 31st, the IRS considers you married for that entire tax year.

What is Head of Household Status?

Filing as Head of Household is usually better than filing as Single because you get a higher standard deduction and lower tax rates. But you have to meet certain requirements:

• You must be unmarried or legally separated on December 31st
• You must pay more than half the cost of keeping up your home
• You must have a dependent child (or other dependent) living with you for more than half the year

If you qualify for Head of Household status, definitely use it. It can save you hundreds or even thousands of dollars compared to filing as Single.

Understanding Alimony and Taxes

Alimony (also called spousal support) is money one spouse pays to the other after divorce. How alimony is treated for taxes depends on when your divorce was finalized.

This is really important: for any divorce finalized on or after January 1, 2019, alimony is NOT tax-deductible for the person paying it, and it's NOT taxable income for the person receiving it. This is because of a law called the Tax Cuts and Jobs Act that changed the rules.

However, if your divorce was finalized before 2019, the old rules still apply. Under the old rules, the person paying alimony could deduct those payments from their taxes, and the person receiving alimony had to pay taxes on it as income.

This difference can be huge when you're negotiating your divorce settlement. If you're getting divorced now, the person paying alimony can't get a tax break for those payments anymore, which might affect how much they're willing or able to pay.

Child Support is Different from Alimony

Child support and alimony are not the same thing when it comes to taxes. Child support has never been tax-deductible for the person paying it, and it has never been considered taxable income for the person receiving it. This rule hasn't changed and applies to all divorces, no matter when they happened.

The IRS views child support as money that parents are obligated to provide for their children, not as income or a deductible expense. So whether you're paying or receiving child support, it won't affect your tax return directly.

Who Gets to Claim the Children?

One of the biggest tax questions in divorce is: who gets to claim the kids as dependents? This matters because claiming a child can give you valuable tax benefits like the Child Tax Credit, the Earned Income Tax Credit, and the Dependent Care Credit.

According to IRS rules, the custodial parent (the parent the child lives with for more than half the year) typically gets to claim the child. But parents can agree to do something different.

How Parents Can Share Tax Benefits

Many divorce agreements include a plan for who claims the children. Some common arrangements include:

Alternating Years: Parents take turns claiming the child each year. For example, Mom claims the child in even years (2024, 2026, etc.) and Dad claims the child in odd years (2025, 2027, etc.).

Splitting Children: If there are multiple children, each parent might claim different children. This can help both parents qualify for Head of Household status.

One Parent Claims: Sometimes one parent claims the child every year, often because they have custody most of the time.

Whatever you decide, the custodial parent must sign IRS Form 8332 to release their right to claim the child if the non-custodial parent is going to claim them. Without this signed form, the IRS will likely reject the non-custodial parent's claim, even if your divorce agreement says they can claim the child.

Dividing Property and Tax Implications

When you get divorced, you'll need to divide your property. Maryland is an "equitable distribution" state, which means property is divided fairly, but not necessarily equally. Understanding the tax implications of property division can help you make better decisions.

Tax-Free Transfers

The good news is that when you transfer property between spouses as part of a divorce, it's usually tax-free. The IRS doesn't treat these transfers as sales or taxable events. However, the person who receives the property becomes responsible for any future taxes related to that property.

For example, if you receive stocks in your divorce settlement and later sell them, you'll owe capital gains taxes on any increase in value since the stocks were originally purchased.

The Family Home

Deciding what to do with the family home is often complicated. If you sell the home while still married and both file jointly, you can exclude up to $500,000 in capital gains from taxes. If you're divorced and file separately, the exclusion is only $250,000 per person.

Some couples decide that one spouse will keep the home, especially if there are children involved. The spouse keeping the home should understand that they'll be responsible for any future capital gains taxes if they sell it later.

Retirement Accounts Need Special Handling

Dividing retirement accounts like 401(k)s, pensions, or IRAs requires careful planning. If done incorrectly, you could face penalties and unexpected taxes.

For most retirement accounts (except IRAs), you need something called a Qualified Domestic Relations Order, or QDRO. This is a special court order that allows you to divide the retirement account without triggering taxes or early withdrawal penalties.

IRAs don't need a QDRO, but your divorce agreement must clearly explain how the IRA will be divided. The transfer must be done correctly to avoid taxes and penalties.

Remember, whoever receives money from a traditional retirement account will pay income tax on it when they withdraw the money later. Roth accounts work differently and may offer tax-free withdrawals if certain conditions are met.

Important Tax Deductions and Credits After Divorce

After a divorce, several tax benefits become available to parents. Understanding these can help you maximize your tax savings.

Medical Expenses

You can deduct medical expenses you pay for your child, even if your ex-spouse claims the child as a dependent. If you pay for your child's doctor visits, prescriptions, or other medical care, keep detailed records. If you itemize deductions and your medical expenses exceed a certain percentage of your income, you may be able to deduct them.

Many divorce agreements specify which parent is responsible for providing health insurance. If you're self-employed and pay for health insurance premiums, these might be deductible expenses.

What Happens If You're Still Married on December 31st?

If your divorce isn't finalized by the end of the year, you're still considered married for that entire tax year. You'll need to decide whether to file jointly or separately.

Filing Jointly vs. Filing Separately

Filing Jointly Usually Means Lower Taxes: When you file a joint return, you typically pay less in taxes and have access to more deductions and credits. However, both spouses are responsible for any errors or problems with the return. If you're worried your spouse might have unreported income or questionable deductions, filing separately might be safer.

Filing Separately Protects You: When you file separately, you're only responsible for your own return. This can protect you if your spouse has tax problems. However, you'll usually pay more in taxes, and you won't be eligible for certain tax credits.

You Can Change Your Mind (Sometimes)

Here's an interesting fact: if you file separately, you can later file an amended joint return before the deadline (usually three years from when you filed). But if you file jointly, you cannot later change to filing separately. So if you're unsure, filing separately first gives you more options.

Common Tax Mistakes to Avoid

Understanding what not to do is just as important as knowing what to do. Here are common mistakes divorcing couples make:

• Filing with the wrong status - Make sure you use the correct filing status based on your marital status on December 31st
• Both parents claiming the same child - This causes IRS problems and delays
• Forgetting Form 8332 - If the non-custodial parent is claiming the child, the custodial parent must sign this form
• Not updating your W-4 form - After divorce, update the form you give your employer so the right amount of tax is withheld from your paycheck
• Ignoring future tax consequences - When dividing property, think about future taxes, not just current value

Special Situations to Consider

If Your Spouse Owes Back Taxes

If you filed joint returns with your spouse in the past and the IRS later finds problems, you could both be responsible for any taxes owed. However, there's something called "innocent spouse relief" that might help if:

• You didn't know about your spouse's unreported income or incorrect deductions
• You thought the taxes were paid
• It would be unfair to hold you responsible

If Your Tax Refund Gets Taken

If your spouse owes child support, student loans, or other debts, the government can take your tax refund to pay those debts, even if you file jointly. If this happens, you might be able to file as an "injured spouse" to get your share of the refund back.

Getting Help from Professionals

Tax laws are complicated, and divorce makes them even more confusing. It's smart to work with professionals who can help:

• Family law attorney - Can help structure your divorce agreement to be tax-efficient
• Tax professional or accountant - Can explain specific tax consequences and help you file correctly
• Financial advisor - Can help you understand the long-term financial impacts of decisions

Planning for Next Year's Taxes

After your divorce is final, take these steps to make next year's tax filing easier:

1. Update your information with the IRS - Change your filing status and address
2. Complete a new W-4 form - Give it to your employer to adjust your tax withholding
3. Keep detailed records - Save receipts for child care, medical expenses, and any other deductible costs
4. Save your divorce documents - Keep copies of your divorce decree, settlement agreement, and any orders about child custody or support
5. Use the IRS Tax Withholding Estimator - This free online tool helps you figure out if enough tax is being withheld from your paycheck

Key Takeaways

Let's review the most important points about Maryland divorce and taxes:

• Your Marital Status on December 31st Determines Your Filing Status: If you're divorced by year-end, you can't file as married. If you're still married, you're considered married for the whole year.
• Alimony Rules Changed in 2019: For divorces finalized in 2019 or later, alimony isn't deductible or taxable. For earlier divorces, the old rules still apply.
• Child Support Doesn't Affect Taxes: Child support is never deductible and never taxable, regardless of when you divorced.
• The Custodial Parent Usually Claims the Child: But parents can agree to different arrangements using IRS Form 8332.
• Property Transfers Are Usually Tax-Free: But think about future tax consequences when dividing assets.
• Retirement Accounts Need Special Orders: Use a QDRO to divide most retirement accounts without penalties.
• Head of Household Status Saves Money: If you qualify, use this filing status instead of Single.

Getting divorced is stressful, and dealing with taxes makes it more complicated. But understanding these basic rules can help you make better decisions and avoid costly mistakes. Don't be afraid to ask for help from attorneys, accountants, and other professionals who understand both Maryland divorce law and tax law. With the right information and support, you can navigate the tax aspects of your divorce and protect your financial future.