Taxes and Your Maryland Divorce

Two settlements that look identical on paper can be worth very different amounts after tax. Working out the tax consequence before signing is not an optional refinement; it is part of knowing what you agreed to.

What follows is general information, not tax advice. The figures and thresholds change, and anything significant should be run past a CPA before you sign.

Alimony: the rule changed in 2019

This is the single biggest change in this area and a great deal of older material still has it wrong.

• Agreements executed after 31 December 2018. The payer cannot deduct alimony, and the recipient does not include it in gross income.
• Agreements executed before 2019. The older treatment continues: deductible by the payer, taxable to the recipient. Modifying such an agreement can change that, depending on what the modification says.

The practical effect is that alimony no longer shifts income to the lower-earning spouse’s bracket, so the same monthly figure costs the payer more than it once did and is worth more to the recipient. Negotiations that assume the old rule produce numbers that do not reflect what either party actually keeps. See alimony and spousal support.

Child support is neutral

Child support is never deductible by the payer and is never income to the recipient. Where a payment covers both and the payer falls short, the shortfall is applied to child support first.

Dividing property between spouses

Transfers of property between spouses incident to a divorce are generally not taxable events at the time of transfer. What travels with the asset is its basis, and that is where people get caught: the spouse who takes an appreciated asset takes the built-in gain with it.

A brokerage account and a savings account of the same nominal value are not the same asset. Neither are a Roth and a traditional retirement account. Compare after-tax value, not headline value. See dividing retirement accounts and property and debt division.

The house

The exclusion of gain on the sale of a principal residence has ownership and use requirements, and it is larger for a married couple filing jointly than for a single filer. Whether you sell before or after the divorce is final can therefore matter. So can who has lived in the home, which interacts with a use and possession arrangement.

Filing status

Your filing status for a tax year generally turns on your marital status on the last day of that year. A divorce finalized in December and one finalized in January produce different filings. Filing jointly one last time is sometimes advantageous and sometimes not, and a joint return carries joint responsibility for what is on it.

Which parent claims the children

The child-related credits generally follow the custodial parent, meaning the parent with whom the child lived for the greater part of the year. That parent can release the claim to the other parent for a given year using the IRS form designed for it. Agreements frequently alternate years, and where they do, the release form has to actually be signed each time. An agreement that says a parent may claim a child does not by itself make it happen.

Do this before you sign

• Compare assets on an after-tax basis, not face value
• Decide who claims the children, and put the mechanism in the agreement
• Check how the timing of the divorce affects the filing year
• Confirm any retirement division is done by the right instrument
• Update withholding and estimated payments once the terms are set

Related

• Settlement agreements
• High-asset and business-owner divorce
• Discovery and financial disclosure

Official resources

• IRS Topic 452, alimony and separate maintenance
• IRS Publication 504, divorced or separated individuals
• Comptroller of Maryland

Talk with a Towson attorney

The Law Office of Thomas K. Mallon, LLC offers a free consultation. Call (410) 847-9075 or request a consultation online. The office is at 1107 Kenilworth Drive, Suite 305, Towson, MD 21204.

This page provides general information about Maryland law. It is not legal advice, and reading it does not create an attorney-client relationship. Maryland law changes, and how it applies depends on the facts of your situation.