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Taxes are probably the last thing on your mind while resolving other divorce issues. But divorced or separated taxes are something you cannot avoid, and tax filing is a must. Your tax filing is going to depend on your final divorce agreement. If you are still separated but not divorced, it will depend on your legal separation status. Your filing status and your former spouse's income will also determine the taxes you owe and any refunds. Tax planning should be part of your financial separation plan. If needed hiring a CPA/Tax Advisor or a Tax attorney might be worth the cost.
Below are some of the tax tips to consider:
The date of the judge's final order for a divorce or legal separation determines your filing status. If you had received a decree on or before December 31st of the tax year, then you cannot file jointly. On the other hand, if the divorce becomes final after December 31st, you can file jointly as a married couple or separately as married. In this case, you cannot file as a Head of the Household or Single. Tax filing status options:
Filing Jointly
You can file together as married if your divorce or legal separation is not final. Filing jointly can lower your taxes since you may be eligible for several tax credits. The standard deduction for a married couple is twice as much as a single tax filer and almost 33% more than heads of the households. You can also be eligible for child tax credit and other deductions such as a mortgage. It can translate into the savings of several thousand dollars that you can split 50/50 once the finances are separated.
The downside of filing jointly is that you may have to contribute towards the taxes even if you owe lesser than your ex. It gets even worse if your ex decides not to pay the taxes. You will be equally liable for any late payment penalties and interest.
However, you can get out of any of your ex's tax obligations by filing the IRS form 8857 that allows you to request relief as an innocent spouse.
Make sure to sign a written agreement with your spouse on who will be receiving the tax refund.
Married Filing Separately
If you are still married and you and your ex decide to file separately, you can do so. The benefit of this approach is that you avoid sharing any tax obligation with your spouse. The biggest drawback of this approach is that you can end up paying more taxes than you would have paid otherwise. It also requires cooperation from your ex when choosing deductions. Both of you have to agree on taking either standard or itemized deductions. In other words, one cannot claim standard deductions while the other one is claiming itemized deductions. If you choose itemized deductions, you can only claim what you contributed. For example, if you and your ex together paid the mortgage and you paid only 30%, then you can get a tax break on only 30% of the mortgage interest. Your ex is eligible for the remaining 70%. The only exception to itemized deduction limit is any medical expenses paid from a joint account. You may not qualify for earned income higher education tax credits while filing separately.
Head of the Household
If your divorce or legal separation is final by December 31st, you may be eligible to file taxes as the head of household. IRS considers you unmarried if you are single, divorced, or legally separated. You can qualify as the head of the household if you:
Only the custodial parent can claim children as dependents and qualify for tax deductions and child tax credit. A custodial parent is the one who takes care of the child regularly, and the child spends more nights with them than the other parent in a year.
As a custodial parent, you can claim the child as a dependent. It also means that you claim the following credits:
As a custodial parent, you may also be eligible for the head of the household status. That can result in a higher tax deduction.
The noncustodial parent can't claim a child as a dependent even if they paid child support. They cannot take a tax deduction for child support either. The law requires both parents to take care of the child. In the case of a noncustodial parent, they are paying for their share of the child's living expenses to the other parent.
As a custodial parent, you do not need to declare any child support as income. Also, be very careful about signing IRS Form 8332 if the noncustodial parent or their lawyer asks you to do so. By signing form 8332, you give up your right to claim your child as a dependent. It allows the noncustodial parent to claim your child as a dependent. You can reverse it only on the following tax year.
On the other hand, depending on your income, form 8332 may not matter much since the Trump tax plan eliminated exemptions for dependents in favor of a higher standard deduction.
If you are paying alimony or spousal support to your ex, you may be eligible for a deduction. IRS allows you to deduct alimony if the court ordered it before 2019. Your former spouse is required to report as an income. However, if it was ordered in 2019 or after, you can no longer claim a deduction. Your spouse is no longer required to report it as an income.
If you or your ex incurred capital gains, then both of you are liable for capital gains taxes unless you are filing separately. Similarly, both of you can split any carryover losses unless you are filing separately.
You cannot deduct legal expenses from filing a divorce. You cannot deduct legal expenses to claim your share of the marital property or alimony payments either. They were deductible before the Trump tax plan in 2017. If you paid legal fees for your former spouse even though it was not part of the divorce decree, then you will owe a gift tax.
Children's shared expenses, such as piano lessons are not tax-deductible. The only shared expense that can be deducted is medical payments. Depending on the share of the medical expense, co-parents can claim a deduction.
Since you and your former spouse are no longer together, you and your spouse need to fill out a new W-4 to declare the dependent count. For example, while married, a high-income earning spouse might claim children as dependents to get more deductions. However, after the divorce, the lower-income spouse is the custodial parent thus making them qualified for those deductions. Both co-parents will need to fill out a fresh W-4 with the updated information.
While during and right after divorce, you may need to file taxes through a CPA or a financial advisor. Most of the online tax filing websites may be sufficient after that unless you have very complex tax scenarios. Some sites even allow you to file taxes for free.
Related:
Tips For Financial Success After Divorce
Should You Split The Christmas Bonus After Divorce
Warning: This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.