Divorce and Taxes: A Comprehensive Guide to Filing After Separation

Divorce and Taxes

Filing Taxes After Divorce

It is Uncle Sam's favorite time of year, whereas for millions of Americans, filing taxes can be a daunting task. It can be even more worrisome for those who have recently experienced a separation or divorce. Filing taxes when you are separated or divorced is more complicated than it may seem, but your tax situation can change in ways you may not be aware of. Therefore, consulting with a divorce attorney or CPA is important to understand how to file your taxes correctly.

Filing Taxes When You Are Separated

If a couple has not been granted a divorce by December 31st of the tax year, they are still considered married by the IRS. Couples who have separated may consider two choices when filing: married filing jointly or married filing separately. 

It is important to note that filing jointly may be beneficial in some cases, as it can provide certain tax benefits that filing separately does not. It may be worth considering if you have children and get along reasonably well with your former spouse.

Filing Taxes When You Are Divorced

The first thing to consider when filing taxes after a divorce is your filing status. Your marital status as of December 31st determines your tax filing status.

You may file as:

  • Single – this applies if you were divorced during the year and are unmarried as of December 31st

  • Head of Household – this applies if you're providing a home for a child, which could reduce your tax liability

  • Married Filing Jointly – you can file jointly with your new spouse if you remarry by December 31st, or remain married, and not divorced, by December 31st  

Benefits and Deductions

Different deductions and benefits exist for each filing category. You would likely want to consult with a CPA or other accountant to determine which election allows you to maximize the benefit in filing your tax return.

Who Can Claim Child(ren) as Dependents?

If you're a parent and have ever filed income taxes, you know how big of an impact claiming your child(ren) as dependents can have on your tax deduction. Filing as a head of household allows you to claim your child(ren) as dependents and receive tax benefits such as Earned Income Credit (EIC), Child and Dependent Care Credit, and Childcare Benefits Exclusion.

Which parent receives the tax benefits depends on the child custody arrangement and divorce agreement. In most cases, you must be the primary custodial parent of the child(ren). Some divorce agreements or parenting plans allow each parent to claim the child in different years. Child support payments are a non-taxable event, which means the child support a parent pays is not tax-deductible, nor are the payments received considered taxable income for the receiving parent. However, the IRS can offset any tax refund you are due for unpaid child support.

Spousal Support and Alimony Deduction Eliminated

Under the Tax Cuts and Jobs Act of 2017 (TCJA), spousal support and alimony are no longer counted as income for the spouse who receives payments. The TCJA also eliminated tax deductions for expenses related to divorce. This applies to any divorce or legal separation executed after December 31, 2018. Spousal support and alimony established in agreements before January 1, 2019, are deductible by the payer and taxable income for the person who receives it.

Property Division and Taxes

In most cases, the equity in a home represents the most valuable asset for married couples. Hence, during a divorce, deciding what to do with the marital home becomes a crucial issue. If neither spouse wishes to keep the family home or cannot afford to buy out the other, then selling the property and splitting the proceeds might be the only option. As you divide property in a divorce, the status of your home can affect the amount you pay in taxes in many ways. For example: 

  • Whoever is listed as the owner of the home when property taxes are due is responsible for paying them.

  • If you remain in the marital home, you can deduct the mortgage interest on your taxes.

  • If the marital home is sold and proceeds are divided, a portion may be subject to capital gains tax.

  • If you buy out your spouse and sell the home to a third party, capital gains tax may apply.

  • If you remain in the marital home, you can deduct the mortgage interest on your taxes.

Rights to IRAs and Pensions after Divorce

When going through a divorce, it is important to consider how to handle valuable assets, such as retirement accounts like Roth IRAs and 401(k)s. These accounts are typically treated as marital property and must be divided fairly in a divorce. 

The vesting schedule of employer-sponsored pensions and retirement accounts can significantly impact the overall value of an account at the time of separation and going forward. For example, if the account is only 50% vested upon divorce but becomes 100% vested later, this can have tax implications. 

It is generally advisable to avoid splitting retirement accounts in a separation agreement. Instead, buying out other assets and having one person retain the retirement account may be better to avoid the negative tax consequences of withdrawing early. 

Consult a Divorce Attorney Before Filing Your Taxes

Whether you are separated or experiencing a divorce, it is crucial to seek professional guidance to determine the correct filing status for you and your former spouse. Filing taxes correctly is essential to avoid unnecessary headaches in the future. Incorrect filing can lead to confusion and may require you to seek out your former spouse for help, which can be a complicated process. Make sure you take the necessary steps and consult with a divorce attorney to ensure your taxes are filed accurately.