Divorce can significantly impact your financial situation, especially when it comes to taxes. Taxes may impact key provisions of your divorce agreement including alimony, child custody, division of assets, and other financial arrangements. Knowing where taxes and divorce intersect can help you navigate financial decisions during your divorce and achieve a positive financial outcome for your future. Tax considerations play a key role in divorce proceedings, influencing how assets may be divided and how agreements are structured. It is important to understand how taxes work during a divorce in Colorado to make informed decisions, avoid unexpected tax bills, and protect your financial future.

In this post, our Colorado divorce lawyers share key tax considerations during a divorce and why consulting both a family law attorney and a tax professional is crucial for navigating these complexities.

Tax Treatment of Alimony (Spousal Support) in Colorado

Alimony is financial support paid by one ex-spouse to the other after a marriage has legally ended. Also known as spousal support or maintenance in Colorado, it is awarded based on the individual needs and specific circumstances of each divorce case. Prior to 2019 and under previous tax laws, alimony payments were deductible by the payer and taxable to the recipient. Under the Tax Cuts and Jobs Act (TCJA) that went into effect on January 1, 2019, current IRS tax rules on alimony state that it is no longer deductible for the payer and is not taxable to the recipient. This change can impact how divorce settlements are negotiated related to alimony, and will no longer affect your taxes if your divorce is finalized after December 31, 2018.

Division of Property, Assets and Debts

During a divorce in Colorado, property is divided equitably in a way that is fair but not necessarily equal. When dividing assets, it’s important to consider the tax implications of dividing property like real estate, retirement accounts, investments, and debts.

  • Real Estate: If you sell the family home during divorce, you may be subject to capital gains tax if the gain exceeds the allowable exclusion.
  • Retirement Accounts: Dividing some types of retirement accounts, including those governed by ERISA requires a Qualified Domestic Relations Order (QDRO) to avoid penalties and taxes on early withdrawals. Individual retirement accounts, not governed by ERISA do not need a QDRO but it is important to understand each plan’s process for dividing accounts, without tax consequences, in conjunction with a divorce. 
  • Investments: When dividing investments such as stocks and bonds, it is important to understand the tax consequences, such as dividends and capital gains, that apply to the holdings in order to divide them in an equitable manner during a divorce. 
  • Debt Division: Like assets, marital debts are divided equitably between spouses during a divorce. The court may consider who incurred the debt, what it was used for, how much each spouse contributed to the debt, and how debt may affect the division of property.

To minimize future tax liability or conflicts, it’s essential to clearly outline the division of assets and debts along with any related tax responsibilities within your divorce agreement. Documenting these items in detail will assist both parties in understanding their obligations, avoiding disputes, and helping plan for the future.

Child Support and Shared Custody

Parents are required to support their children financially in Colorado, with state guidelines that help calculate the amount of support. Child support payments are not deductible by the payer and are not considered taxable income for the recipient. If you share custody of your children, only one parent can claim the child(ren) as dependents for tax purposes according to IRS Publication 501. Some divorcing couples alternate years when claiming the child tax credit and outline this provision into their parenting plan, however, you can agree on a different arrangement or structure to equitably share this benefit. If spouses disagree on how to split the child tax credit, Colorado Revised Statutes 14-10-115(12) provides that the court shall allocate the right to claim dependent children for income tax purposes between the parties in proportion to their contributions to the costs of raising children. Understanding Child-based tax credits in Colorado is essential when writing a parenting plan and can be used as a point of negotiation in divorce settlements. 

Filing Status after Divorce

After divorce, your tax filing status changes and can affect your tax rate and deductions. If your divorce decree is finalized before December 31, each former spouse will file as single, unless you qualify for head of household filing or are remarried during the same tax year. To qualify as head of household, which provides a better tax rate, you must be unmarried by December 31, pay more than half of household expenses, and have a qualifying dependent living with you for more than half of the year. Custody arrangements can impact whether a parent can file as head of household, so it’s important to consider this tax consideration when negotiating your divorce agreement. 

If you are separated, pending divorce couples should file as married filing jointly or married filing separately. Once your divorce is finalized, adjust your withholding amount on your W-2 form with your employer to ensure the correct amount of taxes is deducted from your pay. According to IRS Publication 504, divorced or separated individuals cannot deduct divorce or legal fees, court costs, legal fees for tax advice or alimony, accounting fees, or counseling services in connection with the divorce. 

Impact of Divorce on Health Insurance

Health insurance is another area where divorce impacts your taxes. If you lose coverage under a spouse’s plan, it can create additional financial burdens because you may find a new policy brings higher premiums or lower benefits. Changing your policy can also affect your tax deductions or ability to deduct medical expenses. If you have a health savings account with your spouse, you will need to determine how these assets will be divided in your divorce agreement and if any tax considerations apply.

Tax Resources for Divorcing Couples

Below you will find references and resources to specific tax-related topics and rules for federal and state taxes:

Navigating Taxes in Divorce with Professional Help

It is essential to consult an experienced Colorado family law attorney along with an accountant or qualified tax professional to help you navigate the complexities of how a divorce will impact your taxes. Understanding tax laws and proper planning will help ensure financial stability and protect your short and long-term interests after divorce. 

When speaking to an attorney or tax professional, we suggest these three key action items to follow during your divorce for a successful outcome:

  • Keep Detailed Records: Maintain records of alimony paid, property sales, child expenses, and other financial documents that you can share with your attorney or tax professional.
  • Address Tax Provisions in Your Divorce Agreement: Include specific details about tax provisions such as how assets are divided, who claims children as dependents, and alimony. It is essential for everything to be outlined in your final divorce agreement.
  • Update Your W-4 Form: Adjust your withholding amount with your employer after your divorce is finalized to ensure the correct amount of taxes is deducted from your pay.

At Smith Balicki Finn Laraway, LLC, we understand the complexities of how taxes may impact your divorce in Colorado.

Contact us online or at (720) 420-3610 to learn how we can help you protect your rights during this critical process.

*Attorney Disclaimer: Smith Balicki Finn Laraway, LLC is not a tax law firm. Tax law changes all the time. All information contained in this blog was current as of the first publication and has not been updated since creation.