10 Tax Advice Items for Recently Divorced

Transitioning from filing taxes jointly with a spouse to filing as a single individual after a divorce can feel daunting, especially if you’ve been accustomed to shared finances for years. However, there’s no need to panic. While there are adjustments to navigate, being informed can simplify the process. With a basic understanding of the relevant information, you can file your taxes accurately and maximize your tax benefits as a divorced individual.

After a separation, one of the initial decisions might not seem straightforward. The basic principle is clear: If you are divorced or legally separated by December 31st at midnight, it’s advisable to file your taxes separately. This means that even if you were married for most of the year, you don’t have to file jointly. However, if you’re preparing your taxes in March and your divorce was finalized in January, you were married for the entire tax year, allowing you to file jointly.

Of course, there are drawbacks to consider. For instance, if you’re divorced, you might not want to engage in detailed discussions about finances and their tax implications with your ex. In such cases, the option of “Married Filing Separately” is available from the IRS. It’s worth noting that you won’t qualify for all the tax benefits associated with marriage, but it could be beneficial if one party owes significant back taxes or if you prefer to avoid tax preparation sessions with your ex.

Let’s address one of the major aspects upfront: child custody and support arrangements during divorce proceedings can be highly contentious, and their implications extend to tax matters. Here’s what you need to know about child support to avoid any issues with the IRS.

Firstly, it’s important to note that child support payments are not tax-deductible. This means that if you’re the one making monthly payments, you cannot claim them as deductions on your tax return. Conversely, if you’re the recipient of child support, it doesn’t count as taxable income. This is advantageous for the receiving parent since the received payments are essentially tax-free.

It’s crucial to carefully review the language and implications of your divorce agreement. Some alimony payments, which have distinct regulations (as we’ll explore later), may coincide with a child’s 18th or 21st birthday. Without careful consideration, the IRS might classify these payments as child support as well.

One crucial point to remember post-divorce, especially during tax season, is that both parents cannot claim the same child as a dependent. This rule applies not just for the year immediately following the divorce, but for all subsequent years. Claiming a child as a dependent offers significant tax benefits, making it a highly coveted break, but the IRS strictly prohibits multiple claims for the same individual.

Your divorce agreement might explicitly state which parent is entitled to claim the children as dependents. In such cases, there’s little room for debate; simply adhere to the agreed-upon arrangement (though you’ll still need to complete a form confirming it). However, if the agreement doesn’t specify, the general rule is that the custodial parent (the one who has the child for the majority of the year) is eligible for the credit. Nevertheless, the noncustodial parent can claim the credit if the custodial parent relinquishes their right and completes Form 8332, officially granting permission. This form can also be used to indicate non-consecutive years in which the credit is waived, facilitating an agreement between you and your ex regarding its allocation.

If your divorce wasn’t exactly amicable and your ex-spouse is attempting to claim your children as dependents against your agreement, you might want to consider this next tip. While it may not be the most diplomatic solution, it could serve as an emergency measure. If you’re the custodial parent and facing a dispute over dependent claims, consider filing your taxes before your ex-spouse does.

This strategy might seem too good to be true, but it’s logical. By filing first and claiming your child as a dependent, you shift the burden of proof onto your former spouse. Essentially, you’ve already made your claim, so it’s up to your ex to justify their duplicate claim to the IRS.

Noncustodial parents often face tax challenges, particularly regarding child support payments and claiming dependents. However, there are avenues for finding tax relief amidst the complexity of IRS regulations.

One option is to consider itemized deductions. If you forego the standard deduction and itemize your expenses, you may be eligible to deduct certain child-related expenses, even if you’re not claiming the child as a dependent. Medical expenses, for instance, can be deductible if you’re covering part of your child’s medical costs or treatments. However, there are criteria to meet for claiming these deductions, such as the expenses exceeding 7.5% of your adjusted gross income. It’s essential to ensure your child qualifies as a dependent, meeting conditions like spending at least half the year with one or both parents, receiving at least half of their support from one or both parents, and the parents being divorced or separated.

Another tax break that can benefit not just custodial parents but also noncustodial ones is the head-of-household filing status. This status offers advantages such as a higher standard deduction and potentially lower tax rates. It’s open to unmarried individuals who have a qualifying child or dependent and who cover more than half the expenses of maintaining their household.

Surprisingly, even noncustodial parents can qualify for head-of-household status if they meet these criteria. The key is having a qualifying child who resides with them for more than half the year, although this residency requirement can be addressed in a divorce agreement. However, it’s important to note that claiming the exemption doesn’t exempt one from meeting all the other eligibility criteria for filing under this status.

The recent tax changes have dealt a blow to those involved in alimony payments. Formerly deductible for payers and taxable for recipients, alimony is no longer treated as such. Additionally, lump-sum payments made shortly after divorce are now considered “property settlement funds” by the IRS, meaning they don’t qualify as alimony.

As an alternative to separate alimony and child support payments, some opt for family support, which combines both into a single payment. However, even this approach has been affected by tax reform, as it’s no longer deductible for the payer nor taxable for the recipient. Given the complexities of these changes, seeking advice from a tax professional is advisable for those affected.

Ideally, you and your ex can reach a fair property settlement, but even if assets are divided equally, it doesn’t guarantee an equal tax burden.

When dividing assets during a divorce, understanding the tax consequences is crucial. Consider the family home, for example: While it may seem appealing to let your ex take on the responsibilities associated with it, remember that you can deduct the mortgage interest*. This tax benefit might make it worthwhile to retain ownership of the home.

Assets like IRA and 401(k) accounts carry different tax implications, much like tangible property. When dividing these assets during a divorce, it’s crucial to understand their current and future tax implications.

Take a Roth IRA, for example, where contributions are made with after-tax dollars, requiring declaration on tax returns. While this may seem less attractive in the short term, it offers the benefit of tax-free distributions upon withdrawal. Conversely, with a traditional 401(k), contributions are made tax-free, but taxes are levied upon withdrawal. Consequently, a Roth IRA holds greater value compared to a non-Roth IRA or 401(k), even if their balances are identical.

It might sound cliché, but fostering open communication with your ex about taxes could spare you considerable time, stress, and confusion. Many tax issues stem from misunderstandings or confusion over who is entitled to claim certain benefits or assets. A proactive discussion can prevent IRS audits down the line.

If discussing taxes with your ex is daunting, consider enlisting professional help. While legal fees related to your divorce aren’t usually deductible, you can itemize the cost of tax advice concerning your separation or divorce. Hiring a tax consultant or preparer to clarify the tax implications of your settlement for both you and your ex could be a worthwhile investment in avoiding future complications.