First off, you need to distinguish if you are legally Married, Separated, or Divorced. Sounds straightforward enough, but knowing your legal status is vital to your financial obligations. It can get complicated, but single filers have different tax brackets than their married counterparts. Did you know Divorce can profoundly change your taxes as well as your life? It’s better to be prepared when it comes to your federal income taxes. If you’re divorcing or separating, consult with a tax professional to determine your tax filing status, and to advise you on the most beneficial way to file.
I’m Getting a Divorce
Divorce doesn’t terminate you or your ex’s obligation to pay your fair share of federal income tax. Did you know if you divorce by December 31st of the tax-filing year, the IRS still considers you unmarried for the entire year, and you won’t be able to file a joint return?
What if You’re Separated?
Being separated offers the most confusing aspect of the divorce and tax process. If the courts haven’t issued a legal decree of separation, then you still have the option of filing jointly with your spouse, but once you obtain a final judgment of legal separation, you can no longer file jointly.
Some things you’ll need to consider if you’re divorcing or separating:
- Deciding on a new filing status
- Selling the home
- Deciding who claims dependent children
- Dividing retirement accounts
- Deducting legal fees
Divorcing or Separating: Your New Filing Status
So you’re no longer married, now what? Sorry, you can’t file your federal income taxes with the status of ‘married filing jointly’ or even ‘married filing separately.’ You will now need to choose between single or head of household, depending on how you qualify. There are benefits to filing as head of household. These include a higher standard deduction, eligibility for some useful tax credits, and often a lower tax rate. So, consult with a tax professional to determine if you’re eligible to file as head of household.
Selling the Marital Home
Getting divorced typically means separating your home into two households — that often includes selling the marital home. Divorcing or separating couples may choose to sell a house for several reasons. Maybe neither spouse can afford payments separately, or they can’t agree who should keep the property.
Now, if you sell your home at a profit, this could have implications for your taxes. You might owe a chunk of capital gains taxes on your percentage of the profit. However, many divorcing couples qualify to exclude part of those gains, which helps to escape getting hit with a large tax bill.
Now, if you’re already divorced, and both spouses end up with partial rights to the marital home, each could exclude up to $250,000 in capital gains. Then again, if only one of you ends up holding the property, that person could exclude just $250,000 as a single filer, or half the amount of the joint-filing and dual-ownership exclusions.
When Children Are Involved
After the divorce, you and your ex-partner can’t both file as head of household based on the shared support and care for the same child or children. Your children count as qualifying persons only for the custodial parent (the parent that the child lives with for most of the year). Take into account; divorce decrees usually determine who is the custodial parent.
The parent of the child(ren) live with for the least amount of time, or the noncustodial parent cannot use the child or children to claim head-of-household status. This is true even if the custodial parent discharges the right to claim the child by signing IRS Form 8332. That’s right; only one parent gets to claim a dependent child when filing taxes after divorce. Usually, the parent who gets the deduction is the custodial parent. But as mentioned, an exception can be made using Form 8332, which is signed by the custodial parent (releasing that parent’s claim) and then filed with the noncustodial parent’s taxes. However, if you have more than one dependent child you may each be able to file as head of household by each claiming one of your children. Consult with a tax professional to determine if you are eligible to file as head of household.
Spousal Support and Child Support
As part of the divorce decree, you may be ordered to pay your ex-spouse spousal support. Plus, you may be obliged to pay child support. Each time money changes hands in either situation, and it’s essential to understand the possible effect on your taxes.
Let’s get into the detail – If you were divorced by Dec. 31, 2018, you could deduct all the spousal support you’ve paid from your taxable income. If you receive spousal support as part of a divorce settlement before Dec. 31, 2018, you’ll then need to report it as income for the year and pay taxes on the income. But, tax reform has changed how the IRS treats spousal support. Divorced after Dec. 31, 2018, then you won’t be able to deduct any spousal support you pay. But the good news is if you’re the recipient of spousal support, you won’t have to include those payments in your taxable income.
Child support? Well, it’s never been tax deductible and wasn’t ever considered income for tax purposes.
Shared Retirement Accounts
Here’s another critical issue that often arises in divorce settlements: What happens to my retirement plan?
In many cases, couples must split retirement benefits when a marriage ends. For example, one spouse may be entitled to a share of the other’s workplace pension. However, companies won’t pay pension money immediately, so both parties will have to wait to get their fair share. Depending on the type of retirement account you may need to have a Qualified Domestic Relations Order (QDRO) prepared to divide the account. When the division of retirement accounts are made incident to a divorce, there are no taxes or penalties due.
Deduct Those Legal Fees
Finally, one other essential issue to consider when filing taxes after divorce is; Whether you can receive a tax deduction for all those expensive legal fees you had to pay to end your marriage. Regrettably, the answer is probably no. But you should always consult with a tax professional to determine what you can actually deduct from taxable income.
Divorcing or Separating: The Bottom Line
There’s simply no right way to calculate the emotional costs of ending a marriage, but you can take measures to ensure that filing taxes after divorce goes as smoothly as possible. Make sure you notify the IRS of your new filing status, plus make sure you and your ex are crystal clear on who gets to claim the children as dependents. Also, prepare for any capital gains you may see on the sale of a home.
Always consult with a tax professional to best advise you on how to file your taxes.