When people in New York get a divorce, there are a number of tax issues they should be aware of. A financial adviser along with an attorney may be able to help them understand the tax implications. It is important to be familiar with state law as well as federal.
First, people may want to think about how they will file while the divorce is still underway. They cannot file as single unless the divorce is finalized as of the end of the year, so they may need to file as either married filing jointly or married filing singly. The Tax Cuts and Jobs Act of 2018 has had a significant effect on some aspects of tax filing after divorce. For example, alimony is no longer deductible for the payer from federal taxes although some states still allow alimony deductions. Rules for dependent exemptions have also changed.
There could be tax consequences for assets that are sold or divided, and in some cases, couples may want to think about the timing of certain actions. For example, the tax burden from a home sale may be lower if the couple are married. Some retirement accounts may require a document known as a qualified domestic relations order in order to be divided. The rules for IRAs are different from 401(k)s and do not require a QDRO.
It is important to take these tax consequences into account when it comes to property division in a divorce because taxes could substantially affect the value of assets. Since New York is not a community property state, courts are not required to divide assets equally. Instead, they are supposed to be divided equitably. Couples who are negotiating outside of court may reach an agreement that suits them, but if they go to litigation, they may have less input into the outcome.