Taxes and Your Divorce
With a change in marital status come changes in tax filing – a lot of changes. When we use mediation to negotiate your divorce we will negotiate the different tax issues (such as who is able to take the children as deductions). We also recommend working with an accountant to make sure that you don’t miss anything that would cause you to lose money or get audited.
Filing status
If you were married until December 31 of the filing year, your filing status must be either “married filing separately” or “married filing jointly.” For instance, if a couple’s divorce was finalized on January 3, 2021, they would have filed their 2020 taxes with one of the “married” statuses, even if they had been going through the divorce for most of 2020, because they were still technically married throughout the entire year.
That said, if separated for more than six months, a spouse who has been paying the majority of the household expenses and has at least one dependent can file as “head of household.” The other would file as “married filing separately.”
“Married filing jointly” is actually the filing status with the most deductions and the fewest hassles, so if you and your spouse can cooperate on finances, that status is usually the best option. If you use the tax status “married filing separately,” you will have to decide who will claim dependents that year, who will deduct mortgage interest, etc.
However, when filing jointly, both spouses are responsible for any taxes owed, so if one spouse has a significantly lower income than the other spouse, it might be a better strategy to file separately. A tax expert could help you determine this.
After the divorce is finalized, you have the option to file as “head of household” or “single.”
Claiming dependents
Once divorced, if your divorce decree does not stipulate who claims the children on taxes, the IRS rules that the parent with whom the children spend the majority of the year claims them as dependents. If by some chance, the children stay with each parent for exactly half of the year, the parent with the higher adjusted gross income can claim them as dependents.
This parent would then also receive any associated tax benefits, such as an increase in EIC and any possible Child Tax Credit, Child and Dependent Care Credit, and education or medical deductions.
Family home deductions
Before a divorce, the couple must decide who will get the mortgage interest and property tax deductions if filing separately. After the divorce, the parent who gets the home will have the deductions and the other spouse will lose them. If they sell the home and the profit is divided, the deductions are lost and the spouses will have to pay taxes on the capital gains.
Alimony and child support
Since it would be assumed that, had the couple been together, they would have been paying for their children’s support anyway, child support is not deductible by the payer and does not need to be reported by the receiver.
Alimony laws changed in 2018. For those whose divorces were finalized before December 31, 2018, the one who paid alimony can deduct it and the one who received alimony has to claim it as ordinary income. This remains their status unless they seek a modification.
But for all divorces since that time, alimony or spousal support is not deductible by the payer and does not need to be declared as income by the receiver. So, neither child support nor alimony has any tax effect for recently divorced couples.
Non-liquid assets
When you divorce, you’ll have to decide what to do with 401ks, pensions, and other retirement plans or non-liquid assets. Each form of asset has its own paperwork that needs to be completed in order to divide assets, and you’ll need to guarantee that the forms are written in such a way as to avoid tax penalties from early withdrawal if you divide their value.
It’s unfortunate that tax issues can add to the already existing stress of separation and divorce. We encourage you to find a tax advisor who is an expert in divorce taxes.
We aren’t tax experts here at Elissa C. Goldberg Law Office & Mediation Services, but we know what divorcing couples go through. It’s a challenging time and it’s our goal to help you through it with the least amount of stress on your family and finances. Give us a call at our Doylestown, PA office, (215) 345-5259, for a free initial consultation.