How to Handle Taxes Post Divorce
Taxes may not be anyone’s most favorite conversation (even ours!), yet they are an inevitable and important aspect to your overall financial health. So, we’ve found it’s best to tackle the subject head-on and understand how they can change and evolve this new life chapter.
Handling taxes after a divorce involves several important considerations, as your tax situation can change significantly. Here are 10 tips to help you navigate the key aspects of filing taxes after a divorce:
1. Update Your Filing Status
Your filing status determines many aspects of your tax return. After a divorce, you may need to change your filing status.
- Filing as Single or Head of Household:
- If your divorce is finalized by December 31st of the tax year, you cannot file as “Married Filing Jointly” or “Married Filing Separately.” Instead, you will file as:
- Single: If you were not the custodial parent of any children.
- Head of Household: If you provided more than half the financial support for your household and lived with your child for more than half the year.
- If your divorce is finalized by December 31st of the tax year, you cannot file as “Married Filing Jointly” or “Married Filing Separately.” Instead, you will file as:
- If you were separated but not yet divorced by December 31st, you may still file as “Married Filing Separately” or “Married Filing Jointly.”
2. Claiming Dependents
- Which parent claims the child: After divorce, only one parent can claim a child as a dependent. This is typically the custodial parent (the one the child lives with for more than half the year), unless both parents agree to allow the non-custodial parent to claim the child.
- IRS Form 8332: The custodial parent can fill out Form 8332 to transfer the right to claim the child as a dependent to the non-custodial parent.
Alternate years: Some parents agree to alternate years for claiming the child as a dependent. Be sure to document this in your divorce agreement to avoid disputes.
3. Alimony and Child Support
- Alimony (spousal support):
- For divorces finalized before 2019, alimony payments are deductible by the payer and taxable income to the recipient.
- For divorces finalized after 2018, alimony payments are not tax-deductible for the payer, nor are they taxable income for the recipient (due to the Tax Cuts and Jobs Act).
- Child support: Child support payments are neither deductible by the payer nor taxable to the recipient.
4. Dividing Assets and Property
- No immediate tax impact: In most cases, the division of property in a divorce (such as a home, retirement accounts, or other assets) is not taxable. However, certain transactions may trigger taxes down the road.
- Retirement accounts: If retirement assets are divided (e.g., a 401(k) or IRA), make sure a Qualified Domestic Relations Order (QDRO) is used to avoid immediate taxes or penalties when the assets are transferred.
- Home sale: If you sell the marital home as part of the divorce, you may qualify for an exclusion of up to $250,000 (or $500,000 for joint filers) in capital gains if certain conditions are met.
5. Tax Implications of Dividing Retirement Accounts
- Qualified Domestic Relations Order (QDRO): If retirement accounts (like 401(k)s) are split in a divorce, a QDRO allows for a penalty-free transfer of funds to the ex-spouse. Taxes may still apply when the funds are withdrawn, but using a QDRO avoids immediate tax consequences.
IRA transfers: Transferring IRA funds due to divorce does not require a QDRO, but the transfer must be handled correctly to avoid tax penalties.
6. Health Insurance and Taxes
- Dependents: If your child is covered by a health plan, you can claim a deduction for unreimbursed medical expenses if they exceed 7.5% of your adjusted gross income.
Tax penalties: If one spouse was covered by the other’s employer-provided health insurance, losing that coverage due to divorce may result in increased healthcare costs. Consider the impact on tax planning.
7. Standard Deduction or Itemized Deductions
Review whether it’s beneficial to take the standard deduction or itemize deductions after divorce. Filing separately may affect eligibility for certain deductions, credits, or benefits, like the Earned Income Tax Credit (EITC).
8. Notify the IRS and Update Personal Information
- Change your name: If you changed your name as part of the divorce, notify the Social Security Administration (SSA) first. Once your name is updated, the IRS will receive that information automatically.
Update your address: Submit IRS Form 8822 to notify the IRS of your new address to ensure you receive important tax documents.
9. File Form W-4 with Your Employer
- After your divorce, your tax filing status and number of exemptions may change. To avoid surprises at tax time, file a new Form W-4 with your employer to adjust your withholding based on your new circumstances.
10. Consider Professional Tax Advice
- Consult a tax professional: Divorce can make taxes more complex, especially when dividing assets, calculating alimony, or determining who claims dependents. It may be helpful to work with a tax professional to ensure you’re taking the right steps and minimizing your tax liability.
By staying on top of these key tax considerations after your divorce, you can better manage your finances and avoid issues during tax season.