Newly divorced or going through a divorce? There are a few things you need to know and consider before you file your taxes this year.
Filing Status
When your marital status legally changes, so does your tax situation. How you file is based on your status on the last day of the year. If you were legally married on December 31, 2019 then you must file as married. You may file married filing separately or married filing jointly, but you usually may not file as single or head of household. On the flip side – if your divorce was signed by a judge on or before December 31, 2019 then you cannot file as a married couple for the 2019 tax year.
Filing as Head of Household offers a larger standard deduction and can affect your eligibility for certain tax credits, but there are rules.
- You must be unmarried or “considered unmarried”, legally divorced, or legally separated on or before December 31st of the tax year you are filing.
- You must have a qualifying child or dependent.
- You must have paid at least half the costs of keeping up a home for the year.
To be “considered unmarried” you must file a separate return and meet the following requirements in addition to having a qualified dependent and paying at least half of the costs to keep up the home.
- Your home was the main home for your child or dependent for the tax year you are filing.
- Your spouse did not live in the home for the last 6 months of the year.
Talk about taxes during your divorce
If you are still going through a divorce, it is important to discuss how last year’s taxes will be handled as part of the financial settlement. Not only do you need to figure out your filing status, but what happens if you owe money or are due a refund? This is often overlooked until months after the divorce is finalized and can easily land a couple back in court if they can’t reach an agreement.
It is also vitally important to discuss and understand the tax implications of any negotiated property settlement. Are you thinking about taking money out of retirement accounts? There could be penalties if it isn’t done properly. Are you going to sell an asset like stocks or mutual funds? What taxes will you owe? Are you selling the marital residence? Make sure you know the rules that allow a large portion of your equity to end up in your pocket and not on a tax bill.
Dependents
TWO PEOPLE CANNOT CLAIM THE SAME DEPENDENT. I cannot stress enough that the decision of who claims which child as a dependent for tax purposes needs to be clearly spelled out in your divorce or separation agreement. Generally, the custodial parent will claim the child as dependent and the IRS definition of custodial parent is whoever the child spent more overnights with that year. If the overnights are equal, the custodial parent is the one with the higher adjusted gross income. If your agreement states that the non-custodial parent will claim a child as a dependent, the custodial parent needs to sign IRS form 8332 as a written declaration releasing the claim to an exemption for the child.
Child Support and Spousal Maintenance
Child support is not deductible to the payor nor is it claimable to the payee. If you pay child support you do not deduct it and if you receive child support you do not claim it as income.
Alimony or spousal support may be deductible, but it depends on when your divorce was final. These payments are deductible if you were divorced on or before December 31, 2018. If you were divorced on or after January 1, 2019, these payments are not deductible to the payor nor are they taxable to the recipient.
Talk to HR
Don’t forget to update your W-4. As your filing status will change with your divorce so will your withholding calculations. You have 10 days from the date of divorce to give your employer a new W-4. Since you need to talk to HR anyway, this is also a good time to update beneficiaries.
Taxes can be complicated and mistakes can be costly. It is important to have conversations about taxes during your divorce negotiations so that there are no surprises later. If you are recently divorced or going through the process you probably have questions and concerns you have not had to consider before. Now is the time to seek out a good tax professional.