Year End Tax Considerations For Divorcing Couples

At the start of the year, divorce may have been the furthest thing from your mind, but as the year draws to a close, the end of your marriage may now feel unavoidable. If you and your partner are finalizing the details of an amicable split close to year-end, it’s essential to understand the potential tax implications of separating during this pivotal time. In the following article, discover the top tax considerations to help set the stage for a truly Happy New Year! 

Why Timing Matters

The timing of your divorce can significantly influence your tax situation. For example, if you divorce before December 31, you’ll be considered single for that tax year, which may impact your personal tax rates and overall tax liability. Understanding how the timing of your split aligns with tax regulations is essential for avoiding unexpected financial surprises.

Separation & Tax Credits 

Separation can greatly affect your eligibility for tax credits. While married or common-law couples often enjoy additional benefits when filing jointly, transitioning to filing as single or separated during divorce proceedings may result in a higher tax burden.

For instance, HST credits may change post-separation. Your adjusted family income typically increases when you become married or common-law, which may disqualify you from receiving the HST credit as a single filer. Alternatively, only the lower-income spouse may qualify to receive the HST credit moving forward.

Another credit often lost upon separation is the spousal or common-law partner credit. Separated partners also forfeit the ability to split certain tax credits previously shared when filing jointly.

Finally, if children are involved, only one parent will be eligible to claim child tax benefits after separation. Understanding how your eligibility for tax credits changes is essential to managing your finances during this transition.

Spousal Support & Taxes 

If your separation agreement involves spousal support payments, it can significantly affect your tax situation. For the paying spouse, these payments are tax-deductible, lowering your overall taxable income and potentially reducing the amount of tax owed on the previous year’s earnings—this could even result in a tax refund. Conversely, for the spouse receiving support, it’s important to note that these payments are considered taxable income and must be reported when filing taxes the following year.

Child Support & Taxes 

Unlike spousal support, child support payments are not tax-deductible for the paying parent and do not reduce taxable income. However, these payments do not need to be reported as taxable income by the receiving parent and are not included on their personal tax return.  This understanding of how support payments will be taxed is essential when you are planning how finances will be divided after the divorce.

Tax Implications of Dividing Your Assets

It’s prudent to do the math with your accountant prior to transferring assets acquired during the marriage to your partner. Generally, transfers of property between spouses or former spouses as part of a divorce settlement are not subject to immediate taxation. This includes the transfer of RRSPs, real estate, and other investments. However, once the assets are sold or withdrawn, capital gains tax may apply. And while assets transferred in a non registered account are eligible for a tax deferred rollover to the spouse or common law partner in a separation, any dividend, interest or rental income from the property can still be attributed by to the spouse who originally owned the asset. Therefore, it’s important to determine the tax liability on the asset before filing your taxes the following year.

Seek Financial Advice Before Year End 

As you start this new chapter of your life and figure out how to move forward, know that you don’t need to do this alone. Even if life feels uncertain, you can still approach your financial future with confidence. Taking the first step with professional tax and financial support is crucial. At Shulman & Partners, we understand the complexities of divorce and its financial implications. Our experienced family law team is here to guide you through this process, working alongside trusted tax and financial professionals to ensure you’re set up for success. Let us help you navigate your legal and financial decisions with confidence, clarity, and peace of mind. We are here for you!