When you get divorced, you expect changes to your living arrangements, parenting time, and even financial situation. What’s not always anticipated is the impact divorce can have on your Oregon state taxes.
In Oregon, as in many other states, divorce can bring about significant changes in how you file your taxes, the benefits you’re eligible for, and the liabilities you might face. If you’re not prepared, you could find yourself dealing with unexpected tax bills, missed deductions, or even penalties. These financial challenges can add unnecessary stress to an already difficult situation, so in this blog, we outline how getting divorced in Oregon can affect your state taxes and what you can do to manage these changes effectively.
Filing Status After Divorce
One of the first things that changes after a divorce is your filing status, which determines your tax bracket, available deductions, and even your eligibility for certain credits. Here’s what you need to consider:
Single or Head of Household
If you’re divorced by December 31 of the tax year, the IRS and the state of Oregon consider you unmarried for the entire year. This means you’ll need to file as “Single” or “Head of Household” if you meet the requirements. Filing as “Head of Household” may allow you to claim a higher standard deduction and benefit from more favorable tax brackets, but to qualify, you must have paid more than half the cost of keeping up a home for a qualifying person, like a child.
Married Filing Separately
If your divorce isn’t finalized by December 31, you may still file as “Married Filing Separately.” This status typically results in higher taxes compared to filing jointly, but it might be necessary if you’re in the process of separating finances and don’t want to be held responsible for your spouse’s tax liabilities.
Joint Filing for the Year of Divorce
If you were married for the entire year before your divorce was finalized, you and your spouse may still choose to file jointly. However, you’ll need to agree on how to handle any refunds or tax liabilities. Filing jointly can result in lower taxes, but it also means you’re both equally responsible for any tax debts.
Claiming Dependents
Deciding who claims the children as dependents is another important consideration in a divorce. Having dependents can impact your tax return by allowing you to claim credits like the Child Tax Credit and the Earned Income Tax Credit.
- Custodial Parent: Generally speaking, the custodial parent (the parent with whom the child lives for more than half the year) has the right to claim the child as a dependent. This parent can also claim the Oregon Working Family Household and Dependent Care Credit if eligible.
- Non-Custodial Parent: The non-custodial parent can claim the child as a dependent only if the custodial parent agrees to release their claim by signing IRS Form 8332. This form must be attached to the non-custodial parent’s tax return. In Oregon, this might also affect your eligibility for state tax credits.
- Alternating Years: Some parents agree to alternate years for claiming the child as a dependent. This arrangement should be clearly outlined in your divorce decree to avoid future disputes.
Alimony and Child Support
Alimony (spousal support) and child support are common components of divorce settlements, and they have different tax implications in Oregon.
- Alimony: If your divorce was finalized before January 1, 2019, alimony payments are tax-deductible for the payer and taxable income for the recipient. However, alimony payments for divorces completed after this date are neither deductible by the payer nor taxable income for the recipient. This change can have a big impact on your overall tax situation, so it’s important to plan accordingly.
- Child Support: Unlike alimony, child support payments are neither deductible by the payer nor considered taxable income by the recipient. This means that child support doesn’t directly affect your state taxes, but it’s still a critical part of your post-divorce finances.
Property Division
Divorce often involves the division of property, including real estate, retirement accounts, and other assets. The way these assets are divided can have tax consequences in Oregon.
Real Estate
If you sell your home as part of the divorce, you may be eligible for the capital gains exclusion, which allows you to exclude up to $250,000 of gain from the sale of your primary residence if you file as Single, or up to $500,000 if you file jointly. To qualify, you must have owned and lived in the home for at least two of the last five years. If only one spouse qualifies, the exclusion might be limited to $250,000.
Retirement Accounts
Dividing retirement accounts, such as IRAs or 401(k)s, can be tricky. If done incorrectly, you could face taxes and penalties. To avoid this, a Qualified Domestic Relations Order (QDRO) is often used to transfer retirement assets without triggering taxes or penalties. It’s important to work with a tax professional to ensure that retirement plan and pension plan transfers are handled properly to avoid unexpected tax consequences.
Investment Assets
The division of investment assets, like stocks or bonds, may result in capital gains taxes when the assets are sold. The tax liability may depend on the cost basis and the length of time the assets were held. When dividing these assets, it’s important to consider the potential tax implications and how they might affect your financial situation after the divorce.
Tax Credits and Deductions
Divorce can also affect your eligibility for various tax credits and deductions in Oregon.
- Oregon Earned Income Tax Credit (EITC): This tax credit is valuable for working families and individuals with low to moderate incomes. Your eligibility and the amount you can claim may change after a divorce, especially if your filing status or income changes.
- Oregon Working Family Household and Dependent Care Credit: This credit helps families with childcare expenses. If you’re a custodial parent, you may be eligible for this credit. However, if your filing status or income changes after the divorce, it could affect the amount you’re eligible to claim.
- Itemized Deductions: Divorce may change your ability to itemize deductions on your Oregon state tax return. For example, if you were itemizing deductions as a married couple, such as mortgage interest or charitable donations, your ability to claim these deductions may be reduced after the divorce if your individual deductions don’t exceed the standard deduction.
Tax Liabilities and Penalties
Divorce can lead to unexpected tax liabilities and penalties if not handled carefully. Here’s what you need to know:
- Joint Tax Liabilities: If you and your spouse filed jointly in previous years and there are outstanding tax debts, both of you may be held responsible for paying them, even after the divorce. It’s important to address any joint tax liabilities during the divorce proceedings to ensure that you’re not left paying more than your fair share.
- Innocent Spouse Relief: If you discover that your ex-spouse committed tax fraud or errors on a joint return that you signed, you may be eligible for Innocent Spouse Relief. This relief can protect you from being held liable for the full amount of tax debt. In Oregon, similar protections are available at the state level, so it’s worth exploring this option if you find yourself in this situation.
- Estimated Tax Payments: If you receive alimony or other taxable income after the divorce, you may need to make estimated tax payments throughout the year to avoid underpayment penalties. It’s important to adjust your tax planning accordingly to ensure that you’re meeting your tax obligations.
Consulting with an Oregon divorce attorney can help you understand and prepare for the legal and financial aspects of your divorce. Together, your attorney and tax preparer can work to ensure that your divorce is structured in a way that minimizes your tax liabilities and protects your financial interests.
Speak to a Hillsboro Divorce Lawyer Today
The divorce process can have a major impact on your state taxes in Oregon, affecting everything from your filing status to your eligibility for credits and deductions. Understanding these changes and planning accordingly can help you avoid surprises and ensure that you’re prepared for the tax implications of your new financial situation.
At Harris Velázquez Gibbens, PC, we can provide you with the legal guidance and representation you need to address state tax issues and keep your financial future more secure. To schedule an initial consultation, please call our law firm at (503) 483-8896.
