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Taxes after divorce

Taxes after divorce

Getting through the process of a divorce is already complicated as it is and to add taxes into the mix? It’s a whole new kind of headache. If you have joint accounts, debts, etc., you’ll have to divide these assets up into new independent accounts. On top of that, you’ll also have to look up new financial plans and strategies after the split. 


To help you stay on top of your taxes, we’ve listed down everything you need to know once you file your first tax return on your own during or after untying the knot. 

Find Out Your Filing Status 

Your filing status will directly depend on when you become legally separated. If everything is accomplished on or before the 31st of December—a.k.a the final day of the tax year—then you cannot file for a joint tax return. By then, you are considered single for the entire year.    


However, if the new year or the 1st of January begins before your divorce becomes final, then the IRS will still recognize you as married. This means that they will allow you to file a joint return for the previous year. With this, you will be eligible to file a joint return but if you have no interest in doing so, you can also choose the “married filing separately” status. 


Another thing to keep in mind is that if you’re both still legally married, filing a joint tax return might just be your best option. Choosing this can get you a higher standard deduction—or the amount of income that you can use to lower your tax bill—by combining your income with that of your spouse. 


If you can’t file a joint return, you can still save a bit of money by filing as Head of Household as this status offers a larger deduction. To qualify for Head of Household, you’ll need to meet the following criteria: 


  • Considered unmarried or single, divorced, or legally separated on the last day of the year. 
  • Pay more than half the cost of running and keeping up your house for the entire tax year. This includes utilities, real estate taxes, and home insurance. 
  • Not live in a home with your ex-partner during the last 6 months of the year. 
  • Lived with a qualifying dependent for more than 6 months of the year. 


Take into consideration that, if you are sharing custody of a child, only one of you and your ex-spouse can file as Head of Household. 


If you have tax-deferred accounts, like a charitable remainder trust, and listed divorce as a triggering event to convert your trust so it gives you steady payments thereafter, then you have to take it into consideration when filing, too.

Review Unpaid Taxes in Your Divorce Agreement 

When determining a settlement, the divorce court should consider all of your material assets and debts. Make certain that your legal counsel knows about any federal or state taxes that may still be unpaid. To constantly keep you in check, you can use a tax planning tool.


If at all possible, have your joint back taxes paid with marital assets. This is the best option to avoid owing back taxes with your ex-spouse because the process will be much more complicated after the divorce is final. 


Figure Out How Child Support & Alimony Work

With the new Tax Cuts and Jobs Acts (TCJA) law, the treatment of alimony payments on a tax return has changed significantly. What will happen now is that alimony payments established as a result of divorces finalized after 2018 are not tax-deductible anymore. In effect, recipients of alimony no longer have to include that money in their taxable income. 


On the other hand, child support does not qualify as alimony and is therefore not deductible nor are they considered taxable income. 


Understand Legal Fees When Filing Taxes After The Split 

Generally, you cannot deduct any legal expense from the process of filing a divorce—whether that’s counseling, litigation, or the tax advice you employed during your divorce. 


If you don’t have any legal responsibility arising from your divorce settlement or decree to pay your ex-spouse’s legal fees, then your payments are considered gifts and may be subject to the gift tax. 


For questions and inquiries regarding divorce legal fees, it’s always best to talk to a tax expert as they will guide you throughout the process. 

Know The Deductions & Exemptions Associated with Children 

If you and your ex-partner have children, it’s important to determine who can claim them as dependents as this will directly affect your filing status as well as the tax credits you can claim. 


Whichever parent claims their children as dependents will then become the custodial parent. To put it simply, these are the parents whom the child or children live/s with for more nights during the entire tax year. Oftentimes, it’s the divorce agreement that will name the custodial parent. 


If you are the custodial parent, then you are eligible to claim your children as dependents. You have the potential to claim the Earned Income Tax Credit or EITC and the Child and Dependent Care Credit. Keep in mind that when filing taxes after your separation, you are eligible to use the Head of Household status. 


It’s the other way around for noncustodial parents as they cannot claim the EITC or the Child and Dependent Care Credit. You can, however, claim your children as dependents if the custodial parent signs Form 8332 or the Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. With this, you are eligible to claim the Child Tax Credit and the Additional Child Tax Credit.


One thing to note about this if you’re a custodial parent though is that if you sign Form 8332, you can’t claim the child as your dependent and you will not be able to revoke this until the following tax year.


One thing you shouldn’t miss when you go through a divorce is your taxes. While they might be a pain in the neck, it is absolutely critical for you to understand how the entire process of divorce will impact your taxes. 


As much as possible, the best option for you now is to ask the guidance of a tax expert when it comes to tax matters and a financial advisor when it comes to creating financial goals once the split is over and done with. 


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