Going through a divorce changes almost everything about a person’s finances.
If a couple had joint accounts and jointly held assets and debts, they must divide them up into new, independent accounts. They also need new financial plans and strategies. And they need to start filing tax returns as newly unmarried persons.
If you recently “untied” the knot, here are some things to know as you file your first tax return 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 weren’t legally separated on the last day of the year, you generally must file jointly or as married filing separately.
If you were 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 many cases, 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 honest with the IRS. They’d rather not sign a joint return as a result.
As an alternative, they 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
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.