When you first got married, you probably had to read up on how to file taxes with your new spouse and new filing status. After a divorce, your tax considerations will change again. Besides determining your new filing status, you’ll have additional costs or gains that have tax consequences and if you have children, you’ll have to change the way they are deducted as dependents. When tax season arrives in the year following your divorce, be prepared for many changes and consider hiring a professional to help you navigate the unfamiliar territory.
Filing Status
As long as you were divorced by December 31 in a given year, the taxes you file the following spring will read as if you were divorced for the entire year. If you’re filing taxes in the midst of a divorce, you have options for your filing status. You can choose to file jointly or separately as you have throughout the marriage. Many couples erroneously choose “married filing separately” during a divorce, but it’s best to check with a tax preparer or financial advisor before making decisions about your filing status. Another option is filing as “head of household,” which you can use if:
- You and your spouse lived apart for the last six months of the tax year
- You paid over half of the cost of keeping up your main residence
- You can claim your child as your dependent
The filing status you choose affects your tax rates and standard deduction amounts, so it’s important to choose wisely.
Dependents
Claiming a child on your tax return has huge financial benefits. In addition to the dependent tax credit, you’ll also be eligible for child and dependent care credits and educational deductions. If you and your ex-spouse are filing separately, only one of you can claim your child. That’s why there are strict rules in place to determine which spouse is able to claim a child as his or her dependent. In general, you can claim your child as a dependent if you are that child’s custodial parent, and you cannot claim the child if you are his or her non-custodial parent. A custodial parent is one who has sole physical custody and is designated the custodial parent by court order. If there is no court-ordered custodial parent, then the parent who housed the child for more time throughout the year gets to claim him or her. If both spouses have joint custody and the child spends equal time in both households, the custodial parent is the parent with the higher adjusted gross income. Many divorced couples instead choose to alternate years of claiming dependents, or splitting up the dependents if they have two children
Alimony and Child Support
It’s important not to confuse alimony and child support payments—make sure to keep them separate and track what you pay or receive separately. Why does it matter? Alimony is tax-deductible for the spouse paying it, and it counts as taxable income for the spouse who receives it. Paying alimony can actually have great tax benefits, and it’s an above-the-line deduction, so you can receive the benefits without itemizing. Child support is just the opposite: you cannot deduct it on your taxes if you’re paying it, but you don’t have to pay taxes on collected child support.
If you’re receiving alimony, you’ll have to file a new IRS Form W4 with your employer, because you’ll essentially be earning more income. You may decide to increase your withholdings or make estimated tax payments to account for the additional income. If you’re only receiving child support, you won’t need to change your withholdings.
Property Transfers
The IRS does not recognize a loss or gain of assets when transferred between a married couple during a divorce or “incident to a divorce.” One spouse can easily transfer assets, money, property, etc. to the other spouse without worrying about capital gains or income tax. As long as transfers are made within one year of divorce (or within six years of divorce if so stated in your divorce decree), they are not subject to taxation.
When you sell property or assets acquired through divorce, however, you will have to pay capital gains tax. For instance, if you are given previously purchased stocks in a divorce settlement, you will not pay tax on them. But when you decide to sell them, if their value has appreciated since they were originally bought, you will owe capital gains tax.
One special case is when selling the house. If you and your spouse decide to sell the house together before the divorce is finalized, you are not responsible for tax on capital gains up to $500,000. However, if one of you gets the house in the divorce order and later decides to sell it, you are only allowed up to $250,000 in capital gains before you must pay taxes.
Lots of tax changes come in the years during and following your divorce. It’s best to stay informed and seek help from professional tax preparers and financial advisors to make sure you’re receiving the best possible tax advantages without unwittingly breaking any of Uncle Sam’s rules.
