Many people think that once their divorce is final, they don’t need to think about it anymore. Unfortunately, divorce can rear its ugly head at tax time when it can make the entire filing process a headache. Someone who previously filed jointly or even on their own will find that there are new things they need to do on their tax return after a divorce. Use this list of steps to help walk you through the process of filing taxes when you get divorced.
Step 1: File Under The Correct Status
The biggest change to your tax return will likely be your status. Many married couples file jointly. If you became divorced at any point during the tax year, you can’t file jointly with your ex-spouse. This sometimes confuses people who believe that it’s based on whether you were married for most of the year or not. Even if your divorce isn’t finalized until December, you still can’t file as married for that year – even if it would save you money to do so.
Many divorced individuals go back to filing as single after their divorce. However, consider looking into the option of filing as “head of household” as a possible way to save money. This status often works for people who are recently divorced or going through a divorce. To file as head of household, you must have:
- Lived separately from your spouse for at least the last six months of the tax year
- Paid more than half the cost of keeping up your main residence
- The ability to claim your child as your dependent
- A separate tax return from your spouse even if you’re still legally married
(Also read: 7 Great Tax Benefits Of Being Married.)
Step 2: Claim Dependents Correctly
If you have kids, a divorce can be a lot more complicated, and that applies to your taxes as well. Whether you can claim your children as dependents is dependent upon your custody agreement. The parent designated as the custodian by court order is the only one who can claim the kids as dependents.
Of course, it’s not always so cut and dry these days. If there’s no court order or if you have joint custody, then the parent who has physical custody of the children for most of the year gets to claim them as dependents. If the custody is 50-50, then you’ll need to get creative. Parents with an even number of children can each claim the same number of kids to even things out. Parents with one child or an odd number can switch off who gets to claim the child as a dependent each year. Whatever you decide to do, make sure you and your ex-spouse never claim the same child as a dependent for the same tax year – it’s illegal.
Step 3: Get Alimony Deductions
If you pay alimony, it can actually be a good thing come tax time – but only if you get the deduction right. To get the deduction, you have to be living in a separate residence from your ex-spouse. In addition, your payments have to be part of a written separation or divorce agreement and they can’t be considered child support. Therefore, if your divorce is rather drawn out or messy, you might not be able to qualify for this deduction yet. The good news is that, because it’s an above-the-line deduction, you don’t have to itemize it to get the tax benefit.
If you’re on the other side of the transaction – namely, the spouse receiving the alimony – keep in mind that you have to pay income tax on those amounts.
Step 4: Don’t Try To Benefit From Child Support
Unlike alimony, child support is tax-neutral. That means that neither party receives any tax advantage for it. This is a bonus if you’re receiving it since you won’t have to pay income tax on child support. On the other hand, those who pay child support won’t get any tax deduction for it.
Step 5: Figure Out The House
If you end up splitting the house during your divorce, it has several implications for your taxes – but those might not come into play right away depending on when and if you sell the house. If you end up getting the house, then capital gains taxes could apply when you try to sell it. A married couple could have a gain of up to $500,000 on their primary residence without paying taxes. But as a single person, you have to pay taxes if your house sells for more than $250,000 more than what you paid for it.
Getting divorced can change your tax return dramatically. If this is your first year filing taxes as a divorced individual, consider talking to a tax professional to get advice and to make sure that you are taking all the proper steps on your tax return.