Taxes and divorce might have been the last thing you were thinking about at the time.
But if you’re now separated or newly divorced, it could be worth your while to get some good financial advice before the April 15th tax deadline.
Here are important tax tips for those who are divorced, or are divorcing:
What Is My Filing Status: Divorced or Married?
By law your filing status is determined as of the last day of the calendar year. You are considered unmarried for the whole year if, on the last day of the tax year, you are unmarried or legally separated from your spouse as determined by a divorce or separate maintenance decree.
So if your divorce became official in December, you can’t file as married even if you were for most of the calendar year. Your filing status will be either single, or you can claim “head of household” . Talk to your tax advisor about the benefits, if any.
In some instances, couples in the middle of a divorce may qualify for filing as single or head of household. In order to do so, you must meet the following criteria:
- You have lived apart from your spouse for the last six months of the tax year
- You have paid over half the cost of maintaining your primary residence
- You must be able to claim your child or children as your dependent(s) according to the rules for children of divorced or separated parents
- You have to file a separate tax return from your spouse, even if you are still legally married
Joint Filing Status – What You Need To Know
If you are, or plan on, filing a joint return with your spouse, review your tax return before signing on the dotted line. If there are concerns or inaccuracies, you will be held liable for what is being reported, whether your spouse or a professional tax accountant prepared the forms. Innocent spouse rules have been liberalized in recent tax legislation, making it much easier for spouses to qualify for tax relief.
The current legislation allows a spouse to limit liability on a joint return to his or her separate liability. This is especially important for those separated and who continue to file joint returns with their spouses. It offers greater protection to divorced spouses who face liability for taxes on returns they jointly filed during marriage.
The innocent spouse provisions provide tax relief to a spouse who jointly files with his or her spouse if there was a tax understatement attributable to that spouse and he/she did not know about the understatement when signing the return, nor did he/she have reason to know of a tax understatement.
Splitting Of Property and Joint Assets
Fortunately, you are not required to pay income taxes on assets transferred during divorce. However, if you end up getting the primary residence, you won’t be getting the property tax-free. Capital gains taxes still apply even to the recently divorced and will also be applicable if you decide to sell or unload your house after the divorce.
Under regular circumstances, a married couple will not have to pay taxes on a gain of up to $500,000 on their primary residence. But now as a single person, you can only exempt half of that amount. What this means – if your house sells for more than $250,000 more than what you and your ex-spouse paid for it, you will owe taxes. There is one advantage if you are recently divorced: if you moved out of the house before the divorce was final, and then ended up getting the house in the proceedings anyway, you may still claim the house as your primary residence.
Exemptions for Dependents
As a general rule, a child can only be claimed on one tax return – you can’t both claim the same kid as a dependent. This may present a problem if you are divorced or separated. You can claim your child as a dependent on your tax return if the divorce decree names you as the custodial parent.
In some instances, the noncustodial parent can claim the exemption if the custodial parent signs a waiver pledging that he or she won’t claim the child.
In this case, divorced or separated couples may choose to trade who claims the children from year to year. This method helps to share the tax benefit, and if you only have one child it is your only option. The non-custodial parent must attach the waiver declaration to his or her tax return for the tax year beginning in that calendar year.
But if you have more than one child, you may chose to split the dependency of the kids up between the two parents, which is allowed even if both kids spend the same amount of time with each parent.
Other Exemptions for Dependents
- Medical Bills and Expenses – If you pay your child’s or children’s medical bills after the divorce, you are entitled to include those costs in your medical expense deductions even if your ex-spouse has custody and claims the dependency exemption.
- You can still claim childcare credit for work related expenses you incur, even if your former spouse qualifies to claim the dependency exemption, to care for a child or children under the age of 13. Keep in mind, only the parent claiming the child as a dependent can claim the child tax credit.
Child Support: A Tax-Neutral Concern
Child support is always tax-neutral, meaning unlike alimony it doesn’t affect your taxes in any way. It is non-taxable income to the person receiving it and it is not tax-deductible by the person paying it . In some cases, you or your spouse may be paying both spousal and child support. In this situation, you may not lump both payments together and call them “spousal support” in order to claim a bigger tax deduction. This is against the law and you may end up owing back taxes, penalties, and interest if your support payments are not structured correctly in your divorce agreement.
Alimony Payments and Tax Deductions
A spouse paying alimony may take a tax deduction for those payments, even if he or she doesn’t itemize their deductions. This means, if you’re the one paying alimony, you will have a lower tax bill. By Law, the IRS won’t consider the payments to be true alimony unless they are made in cash and spelled out in the divorce agreement – and cannot be considered child support. The spouse receiving the payment must pay income tax on those amounts. Make sure you know your former spouse’s Social Security number because it needs to be reported on your tax return to claim the alimony deduction.
Sharing a residence after a divorce changes the rules for a tax deduction for those alimony payments. If you and your ex-spouse share and maintain a residence after the divorce, any alimony payments made during that time of share residence cannot be deducted. Keep this in mind if you are facing extended divorce proceedings due to finances or custody battles. Even under these explanatory circumstance, you may still have trouble qualifying for the deduction.
Other Itemized Deductions
For other itemized deductions, such as charitable contributions and the like, you would generally be able to claim the expenses you paid individually and half the expenses that were paid from a joint account while you were married.
Legal fees and expenses involving personal matters are normally not deductible, but you can deduct the portion of fees paid to divorce-industry professionals (example: lawyers, accountants, or appraisers) for tax advice or for help in getting spousal support. Additionally legal expenses related to the taxpayer’s business are usually deductible. If you own and operate a privately held business and incurred legal expenses related to that business during the divorce process, then those expenses may also be deductible.
Final Tips On Taxes And Divorce
If you divorce in the middle of a tax year, your judgment or settlement agreement should clearly define how income earned and expenses paid during the marriage are to be reported. This helps to ensure filing accuracy and avoid inconsistent returns. If for some reason the income earned and expenses paid during the marriage is not clearly detailed in the divorce agreement, you should consult with your former spouse when preparing your tax return to avoid IRS issues which will impact to both your return and that of your former spouse.
In order to have the most up to date and accurate information regarding your taxes, please make sure to consult with a Tax Attorney or Certified Public Accountant before applying this information to your particular situation.
If you need additional legal help with your divorce, please contact our office at (561) 655-8844.