If you’re recently divorced or currently undergoing one, you’re likely thinking about hundreds of subjects at once: Are my finances in order? How much will my legal fees be? Will my children understand the separation? Who will get the house? What will my custody fees be?
Taxes may be the last thing on your mind, but divorce can have a significant impact on your filing status, credits, and deductions. To assist those going through such a seismic life event understand its tax implications, DivorceForce has outlined several important considerations.
What Changes Should You Consider?
First, you’ll need to consider minor, often overlooked, changes. After a divorce, you may have moved to a new home and legally changed your last name. If one or both of these has been altered, ensure your official tax documents reflect this. Notify the Security Administration of the change and file Form SS-5, Application for a Social Security Card, by calling 1-800-772-1213 or visiting SSA.gov. The Internal Revenue Service (IRS) states: “The name on your tax return must match SSA records. A name mismatch can delay your refund.” You may also want to consider submitting a new Form W-4 to your employer to have your tax withholding adjusted according to your new circumstances.
When Does the IRS Recognize Your Divorce?
According to the IRS, if your divorce isn’t final as of December 31 of the tax year, even if you’ve filed, you’re still technically married. A court order must state that you are divorced or legally separated by that date. On the other hand, you are officially considered unmarried for the entirety of the year if a court-issued decree is made, you’re separated by court order, or you have a decree of annulment on or by December 31.
How Should You File Your Taxes?
Filing status determines tax bracket, exemptions, deductions, and eligibility for credits. Your status depends on a number of factors, including whether or not the IRS recognizes your divorce.
If you are still legally married, but separated, you can file a joint married return, making you eligible for a higher standard deduction, according to financial publication The Balance. However, it means you’re both on the hook for tax liability. You also have the option to file separately, which relieves you of any of your spouse’s tax payments, but typically results in a higher rate. Tax preparation provider Tax Act also states you won’t be “allowed to claim certain credits, including the earned income credit and education credits.”
Generally, those legally unmarried file as single, but you may qualify for head of household, which can allow for a larger standard deduction, tax credit eligibility, and a lower tax rate. To file for this particular status, you must meet certain criteria, including:
- You paid at least half the cost of keeping up a home during the year you’re filing.
- You have a dependent such as a qualifying child or relative who either lived with you for half the year or meets other requirements. You and your ex can’t file as head of household based on the care of the same child or relative.
Who Claims the Children?
If you have one child, only one parent can claim them as a dependent. For parents with an even number of children, such as two, each parent can claim one child. Typically the custodial parent or the wage-earner claim the child(ren). It doesn't benefit the non-wage earner to claim them.
By claiming your child, you can file for head of household status and become eligible for the child tax credit ($2,000 per qualifying child), a tax credit for child care and dependent care expenses, the earned income tax credit, and the American opportunity tax credit (AOTC) for qualified education expenses. The noncustodial parent can claim the children if the custodial parent signs Form 8332, which releases their claim.
If you and your ex can’t decide who claims your children, the IRS provides tiebreaker rules, which “explain who, if anyone, can claim the [earned income credit] when more than one person has the same qualifying child.” For the specific rules and examples, check out the agency’s Publication 596. These rules do not apply if you file a joint return.
Are Child Support & Alimony Deductible?
If you receive child support, it isn’t taxable. If you pay child support, it isn’t deductible. Prior to 2018, spousal support was taxable and deductible. The IRS now states: “You can’t take a deduction for alimony payments you made to or for your former spouse if you executed your divorce or separation agreement after December 31, 2018, or if the agreement was executed on or before December 31, 2018, and was changed after December 31, 2018, to expressly provide that the [Tax Cuts and Jobs Act (TCJA)] provision on alimony applies to the alimony paid and received under the changed agreement.” The recipient spouse can no longer include alimony payments in their gross income, either.
What About Spousal IRA & Healthcare?
If your divorce is finalized by Dec. 31 of the tax year, you can’t deduct contributions you make to your ex’s traditional IRA, according to the IRS. However, you may be able to deduct contributions made to your own traditional IRA.
Can Divorce Expenses Be Deducted, Too?
The cost of any legal or divorce expenses cannot be deducted. Prior to the TCJA, you could deduct fees related to generating income, such as paying a lawyer to get alimony.
Are Transferred Assets & Home Sales Taxed?
When assets are transferred from one spouse to the other in a divorce settlement, the recipient doesn’t have to pay taxes on it. However, if they acquire the property and later sell it, it could be subject to capital gains tax if appreciated, explains the article “Most-Overlooked Tax Breaks for the Newly Divorced” by business and personal finance publisher Kiplinger.
If you and your ex decide to sell your marital home, you may not consider taxes. Generally, a couple can avoid paying taxes on the first $250,000 of gains on the sale if they’ve owned and lived in the home for two out of the last five years. If still legally married and filing jointly, you can exclude up to $500,000. For couples who haven't lived in the home for two years within the last five, they can qualify for a reduced exclusion depending on the time the home was owned and used.
Although we’ve answered several questions, it’s crucial you engage a financial advisor to provide you with a comprehensive overview of tax considerations. A Certified Divorce Financial Analyst can look at your specific situation and explain the taxes you may incur, and the deductibles and credits available. To find a financial expert in your area, check out DivorceForcePRO, DivorceForce’s resource of divorce professionals. Click the “Financial” category and filter through our listings to find a local specialist.
Gregory C. Frank is the CEO and Founder of DivorceForce.