Going through a divorce is emotionally draining and can be a complicated process. Everything in your life changes.
That includes your tax situation.
The biggest tax implications happen following the divorce. The last thing you need is to be blindsided on April 15th with a tax bill.
Here are five things you need to know about filing your taxes after divorce.
FILING STATUS MATTERS
Your marital status at the end of the calendar year determines your filing status for that entire year.
If you are separated but not yet divorced you can file a joint return or you can file as married filing separately. Filing a joint return can reduce tax liability but could also complicate the situation when it comes time to divide any refund, or pay the amount owed.
Once your divorce is finalized you cannot file a joint return. However, you may be able to file as head of household if you had a dependent living with you for at least 50% of the year and paid more than 50% of the cost to maintain your home.
Filing as head of household allows you to take advantage of larger stand deductions any benefits from being in a lower tax bracket. It also protects you from any tax liability that results from filing errors made by your former spouse.
CUSTODIAL PARENTS CAN CLAIM EXEMPTIONS
If you are the custodial parent, you may be able claim your child as a dependent if they lived with you for the majority of the calendar year. Custodial parents claim their child as a dependent may also be able to claim a $1,000 child credit, if their child is eligible. Custodial parents can also claim higher education tax credits and deduct work-related child care expenses for children under 13.
Medical expenses for your child paid by you may also be deductible regardless of who is the custodial parent.
It is also important to note that the Superior Court cannot award one parent or the other the authority to claim a dependency exemption for their child/children.
However, in mediation or settlement negotiations, the parties may agree as to who receives the dependency exemption and it can be incorporated into your final judgment and decree of divorce.
Even further, if the parties have more than one child, they may agree to divide the dependency exemption amongst the parties
ALIMONY AND CHILD SUPPORT ARE DIFFERENT
Alimony (spousal support) may be taxable as income for the recipient and deductible for the payor.
Any spousal support provided before or outside of a written separation agreement or divorce decree is not counted as income, nor is it deductible to the payor.
Child support is neither taxable nor deductible as long as it is distinct from spousal support in the divorce decree.
WATCH YOUR ASSETS
Your divorce settlement may include asset transfers such as property or investments. If you are the receiver you are not taxed on the transfer. However, if you sell the asset, you will have to pay capital gains tax on the increase in the asset’s value before and after the transfer.
Also be careful with retirement assets such as 401(k) plans. If you cash out a plan to give money to your former spouse you will incur a tax liability. To avoid this, transfer the money from the retirement asset through a Qualified Domestic Relations Order.
Homes may have to meet the “two-year test” to minimize your tax liability. When you owned a home as a married couple, and the home was your primary residence for two out of the last five years, you and your spouse may be exempt from the first $500,000 of gains made from the home’s sale.
Your attorney can advise you about tax consequences regarding the home.