Divorces bring a significant number of changes to former spouses' lives once they are finalized. Many of the changes are financial in nature, including the effect divorce has on both federal income tax and Colorado's state income tax. Being knowledgeable about tax issues can decrease the chances of having to deal with unexpected financial burdens in the future.
One thing spouses must know when determining the tax implications of divorce is who will claim the children. Legally, the parent who is entitled to claim the children is the one with whom they lived for at least half of the year. However, spouses can come to an agreement concerning the claiming of the children on tax returns.
The next thing spouses must consider from a tax perspective are 401(k) investments. Spouses who are ordered to split a 401(k) who transfer funds using a Qualified Domestic Relations Order (QDRO) can avoid both penalties and having the funds taxed as income. Spouses who choose to withdraw the funds early and pay their ex-spouses in cash will be both penalized and taxed. Lastly, the spouse who is awarded the home is eligible to claim deductions for mortgage interest. In situations where both spouses remain owners of the home, the spouses divide the deduction.
Tax Filing Status
While divorce will eventually result in a change in filing status, from married to single, spouses who are able to divorce amicably may be able negotiate on some aspects that will be mutually beneficial at tax time. Spouses who are unable to negotiate on their own may benefit from the help of an experienced mediator. If nothing works and no agreements can be made, the case must go through the litigation process. In that case, the family court system in Colorado will make the decisions about who claims the children, how to split the 401(k) and who will retain ownership of the marital home.
Source: Forbes, "Getting Divorced? 8 Things You Must Know About Taxes", Emma Johnson, Jan. 19, 2015