Income Tax Effects of Colorado Divorce

Summary:  Divorce should not result in any taxable income to either party.  Except that mainteance payments are tax deductible to the payor and taxable income to the payee. If you think you will divorce and either spouse has a business or is not reporting all of the income, you should file your tax returns separately prior to the divorce.

The Income Tax Results in a Colorado Divorce

Except for the change in filing status to unmarried and the tax effects of the payment of maintenance (alimony), a Colorado divorce should be tax-free to both spouses.

The income tax effects of a divorce can include:

1. The change in the filing status from married to unmarried;

2. The tax exemption for dependent children can be taken by only one of you each year, generally it is alternated (must be current on child support to take your exemption);

3. The payment of maintenance is tax deductible to the payor and taxable income to the recipient; and

4. The sale of any investment property may be taxable income, generally capital gain (the same as if you sold it during the marriage).

The Following Colorado Divorce Events Are Not Taxable Transactions:

1. The payment or receipt of child support;

2.` The sale of a principal residence, as long as the gain is less than $500,000 for a married couple (some exceptions do apply);

3. The division of retirement assets with a QDRO as long as none are withdrawn;

4. The division of investment accounts where none is sold;

5. The payment of cash to the other spouse as part of the divorce settlement; and

6. The refinance of any real property, or a vehicle.

* * * * * TIP:  If you think you are going to get a divorce, file your tax returns separately if either spouse has a business or is not reporting all of the income.  Neither of you should be liable for the other's tax for the tax years prior to the divorce.