Divorce and Taxes: Things to Keep in Mind When Your Spouse Becomes Your Former Spouse

It’s that time of year again — Tax Day! When it comes to filing and paying taxes, things work a bit differently when you’re divorced. In today’s blog, we’ll go over how to file taxes after getting divorced. The first thing to keep in mind is that it doesn’t matter how long you’ve been married. When your marriage ends, your tax situation changes. Here are some things to consider when filing your tax return:

  • Choosing a New Filing Status;
  • Deciding who Claims the Dependent Child;
  • Reporting Alimony and Child Support;
  • Home Sales;
  • Sharing Retirement Accounts;
  • Deducting Legal Fees.

Choosing a New Filing Status:

You have to choose a new filing status when filing your taxes. You can no longer file as “married filing jointly” or “married filing separately” on your tax return. You have to file as “single” or “head of the household” instead. But you can only qualify as Head of Household if:

  • You are no longer married as of December 31st of the year you are filing your tax return;
  • You have paid at least half of the household expenses; and
  • You have a “qualifying person” who lived with you for half a year or who meets other specific requirements.

Both partners cannot register as Head of Household. Children can count as a qualifying person, but only for the parent with whom the child spends the majority of the year. The custodial parent is usually determined by divorce settlement agreements. The non-custodial parent cannot use the child to claim the title of Head of Household. There is no exception for head-of-household status if the custodial parent releases the right to claim the child by signing IRS Form 8332 (which allows the noncustodial parent to claim the child as a dependent).

Deciding who Claims Dependent Child:

When it comes to determining who claims the dependent child following a divorce, only one parent has the authority to do so. In most cases, the custodial parent is the one who has custody of the child. However, bear in mind that exceptions can be made using the previously described Form 8332.

It is advantageous for a custodial parent to claim the child as a dependent in order to gain Head of Household status and become eligible for certain tax credits such as:

  • Child Tax Credit
  • Tax Credit for Child Care and Dependent Care Expenses
  • Earned Income Tax Credit
  • American Opportunity Tax Credit

The non-custodial parent does have the right to claim the child as a dependent, as well, but it usually must be previously agreed upon pursuant to a divorce or other custody/child support agreement. Parents often agree to alternate the tax exemption, with one parent claiming the child in even years and the other claiming the child in odd years. Note that alternating the tax exemption applies only if the non-custodial parent regularly pays child support.

Reporting Alimony and Child Support:

You may agree to pay alimony to your ex-spouse as part of your divorce settlement. It’s also possible that you’ll be expected to pay child support. It’s important to consider the possible tax implications if money changes hands in either case. Depending on when your divorce was finalized will determine whether you are permitted to deduct your alimony payments on your taxes. If you were divorced on or before December 31, 2018, you are permitted to deduct your alimony payments and your former spouse will be required to include those alimony payments as part of their taxable income. However, if you were divorced after that, alimony is no longer considered tax deductible and is no longer included as part of gross taxable income. Notwithstanding these changes to the tax treatment of alimony, child support has never been tax deductible or considered part of gross taxable income. That has not changed.

Home Sales:

In the event of a divorce, the marital home is often sold if neither party can afford to buy out the other’s interest. If the home is sold for a profit, you will have to pay capital gains taxes on your share of the profit. However, many divorcing spouses are eligible to deduct a portion of their gains, which may help them escape a large tax bill. If you have owned your home for two of the five years before selling it and haven’t removed capital gains from the sale of any other house in the previous two years, you will be able to deduct up to $500,000 in gains if you sell it while also filing a joint return. If you’re already divorced and both partners wind up owning a portion of the house, both of you will be eligible to deduct up to $250,000 in profits. For instance, if only one of you owns the property, you can only deduct $250,000 as a single filer, which is half of the joint-filing and dual-ownership exclusions.

Sharing Retirement Accounts:

When two parties are divorcing, their retirement benefits are subject to distribution. For example, one partner might be entitled to a portion of the other’s workplace pension. As part of a divorce settlement agreement, courts will issue a Qualified Domestic Relations Order (QDRO), in order to effectuate the distribution. QDROs give pension plan managers orders stating that a portion of a pension should be paid to an alternate payee, such as a former spouse. Who will receive compensation, when those payments will be made, and what percentage or sum of benefits will be paid to the alternate payee must all be specified in QDROs.

Deducting Legal Fees:

Finally, when it comes to filing taxes following a divorce, many people ask whether they are able to deduct any of the large legal costs they may have paid in order to finalize their divorce. Regretfully, the response is most likely no. Legal fees associated with a divorce are not deductible on your taxes.

While the emotional cost of ending your marriage cannot be quantified, you can take measures to make the process of filing taxes after divorce as easy as possible. Feel free to contact us at jennyb@birzlaw.com or call (201) 701-1218 to discuss the specific details of your matter.