Going through a divorce changes almost everything about a person’s finances.
If couples had joint accounts and jointly held assets and debts, they must divide them up and open new, independent accounts. They need new financial plans and strategies. And they need to start filing tax returns as newly unmarried persons.
Here are some things you should do as you file your first returns on your own:
Determine whether you are married or single for tax purposes.
If you are in the process of getting a divorce, but your divorce is not yet final and you weren’t legally separated on the last day of the year, you generally must file jointly or as married filing separately for the year.
If you were legally separated and divorced by the last day of the year, for tax purposes you are considered single for the entire year.
However, for Head of Household filing status, you may be considered unmarried even if you were not legally separated or divorced.
To be considered unmarried for tax purposes and file as Head of Household, you must meet the following criteria:
- File a separate return, which means a return claiming married filing separately, single or head of household.
- Must have paid more than half the cost of keeping up your house for the tax year.
- Your spouse didn’t live in the home during the last six months of the year.
- Must have maintained the primary home for more than half the year for your dependent child (or child who would be a dependent even if you released the exemption to the other parent).
You will generally pay less taxes by filing as Head of Household. The second best filing status you may qualify for as a divorced person is Single.
If you must use the Married Filing Separately status, you will probably pay the highest tax filing.
If you are not divorced or considered unmarried, decide whether to file jointly or separately.
If you were married on the last day of the year, you can still file a joint return with your ex-spouse. This may be easier if you paid expenses jointly.
You may have a lower total tax bill with one joint return than if you both filed separately as some tax deductions, credits and other benefits are unavailable or limited when you file separately.
Occasionally a couple can pay less by filing separately. This is likely to be true if one spouse has deductions that are limited by a percentage of income, such as high medical expenses.
The best way to find out which filing status results in a total lower income tax bill is to enter the numbers both ways using TaxAct.
Many couples in the midst of a divorce would rather not file jointly regardless of the tax consequences. For example, an individual may wonder if the ex-spouse is being honest with the IRS, and they’d rather not sign a joint return as a result.
They also may want to claim their own tax refund. Both are good reasons to consider filing a separate return.
Be sure to consider unpaid taxes in the divorce agreement.
The divorce court should consider all marital assets and debts in determining a settlement. Make sure your legal counsel knows about any unpaid federal or state taxes.
Try to have joint back taxes paid with marital assets, if possible. It is best to avoid owing back taxes with your ex-spouse after the divorce is final.
Understand how alimony and child support are treated for tax purposes.
If you pay alimony, you can deduct it on your tax return as an adjustment, even if you don’t itemize your deductions. If you receive alimony, you must report it as income.
Only alimony is deductible by the payer and taxable by the person who receives it. If an ex-spouse gives extra money voluntarily, or pays the other spouse’s mortgage or other expenses, it is not considered alimony.
Child support, on the other hand, is not deductible by the parent who pays it. The custodial parent receiving child support does not pay tax on it.
Deduct certain costs of a divorce.
The basic costs of a divorce are not deductible. However, you can deduct fees you pay for expenses such as tax advice relating to a divorce, determining or collecting alimony, determining estate tax consequences of property settlement and appraisal and actuary fees for determining the correct amount of tax or assisting in obtaining alimony.
You generally deduct these costs as miscellaneous deductions on Schedule A.
You can deduct them with your itemized deductions to the extent that they, with other miscellaneous deductions, exceed 2 percent of your adjusted gross income.
Determine who gets to take the dependency exemptions.
If one parent has custody of a child, the custodial parent (for the greater part of the year) generally claims the dependency exemption and the child tax credit for the qualifying child.
However, a custodial parent can allow the other parent to take the exemption and child tax credit by signing Form 8332.
Typically only the custodial parent may claim the earned income credit because the child must meet the residency test, which means the child must have lived with the parent for more than six months of the year.