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Going through a divorce changes almost everything about a person’s finances.
If a couple had joint held accounts, assets, and debts, they must divide them up into new, independent accounts. They also need new financial plans and strategies, which include filing tax returns as newly unmarried people.
If you recently “untied” the knot, here are some things to know as you file your first tax return after divorce on your own.
Determine whether you are married or single for tax purposes
If you are still in the process of getting a divorce and won’t be legally separated on Dec. 31, you generally must file jointly or married filing separately.
If you will be legally separated or divorced by the last day of the year, you are considered single for the entire year.
To file as Head of Household, however, you may be considered unmarried even if you weren’t legally separated or divorced by Dec. 31. Generally, you’ll pay fewer taxes by filing as Head of Household. But you must meet the following criteria:
- File a separate tax return from your ex-spouse
- Pay more than half the cost of keeping up your house for the tax year
- Not live in a home with your ex-spouse during the last six months of the year
- Maintain the primary home for more than half the year for your dependent child
The second most tax-advantageous filing status you may qualify for as a divorced person is Single.
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. That 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. That’s because some tax deductions, credits, and other benefits are unavailable or limited when you file separately.
Occasionally, a couple pays less by filing separately. That is likely to be true if one spouse has deductions that are limited by a percentage of income, such as high medical expenses.
One of the best ways to find out which filing status results in a total lower income tax bill is to enter the numbers both ways using TaxAct.
In some cases, couples in the midst of a divorce might not want to file jointly regardless of the tax consequences. For example, one of the spouses could wonder if his or her ex-spouse is honest with the IRS. As a result, they would rather not sign a joint return to ensure they aren’t liable for any tax responsibility issues down the road.
As an alternative, they may simply 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
When the Tax Cuts and Jobs Act (TCJA) was signed into law, the treatment of alimony payments on a tax return changed. Under the old law, if you paid alimony, you could deduct it on your return. And if you received alimony, you had to report it as income on your return. Now, any alimony payments established as a result of a divorce finalized after 2018 are no longer tax-deductible. TCJA eliminated the deduction for alimony payments entirely. Recipients of alimony also no longer have to include that money in their taxable income.
If your divorce or legal separation is executed after Dec. 31, 2018, you cannot deduct alimony payments on your future tax returns. You also cannot deduct them if your divorce is modified after 2018 and the modification specifically states the TCJA treatment now applies. If your divorce is finalized in 2018, your alimony payments are still deductible.
Child support does not qualify as alimony. Those payments are not deductible or considered taxable income.
Deduct certain costs of a divorce.
The basic costs of a divorce are not deductible. You also can no longer deduct fees paid 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.
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 non-custodial 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.