How Do My Taxes Change Once I’m Divorced?

Navigating the complexities of divorce extends beyond emotional and legal dimensions; it also introduces changes to one's finances, including tax implications. As couples undergo the process of separation, it’s important to have a firm understanding of how tax filing is impacted. The intricacies are complex, from changes in filing status and the management of dependents to the impact on alimony, property division, and retirement accounts.

Let's take a look at how taxes might shift post-divorce. We'll explore important factors and offer helpful tips for anyone navigating this.

How is my filing status affected?

The answer to this question depends on your divorce status by December 31. If you’re separated and in the process of getting a divorce, you will probably still be filing as married filing separately or married filing jointly, since you’re not legally divorced.

Although you may be hesitant to file jointly, it could potentially give you the most tax benefits. You get a double standard deduction amount, for example. But if you’re ready to start managing your finances solo, filing separately might be a clear way to do that.  

If you’re legally divorced by the end of the year, your filing status will either be single or head of household.

Head of household filing status allows for a higher standard deduction rate, and you can be taxed at a lower income tax rate.

What about children of divorced parents?

This is where things can get really complicated when it comes to divorce and taxes. Typically, there are many tax credits parents are eligible to claim for their dependents. Divorced parents can only claim the credits if they have the child's main custody.

These tax credits include the Child Tax Credit, American Opportunity Tax Credit, Child and Dependent Care Credit and the Earned Income Tax Credit. Only one parent can claim the credit.

Some key points to keep in mind are:

• The IRS allows the custodial parent to claim the dependency exemption for the child. The custodial parent is the one the child lived for the greater part of the year. The custodial parent can release the claim to the noncustodial parent by filling out IRS Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent).
• The custodial parent is generally eligible to claim the Child Tax Credit. This credit provides a reduction in the amount of income tax owed for each qualifying child under the age of 17.
• If you are the custodial parent and incur childcare expenses to allow you to work or look for work, you may be eligible for the Child and Dependent Care Credit.
• If you are paying for your child's education expenses, you may be eligible for education-related tax credits, such as the American Opportunity Credit or the Lifetime Learning Credit.
• The parent providing the majority of the support may be eligible to claim the children as dependents for health coverage purposes.

What exactly is a qualifying child?

A qualifying child or dependent refers to an individual who meets certain IRS criteria, and you may be eligible to claim that person as a dependent on your tax return. Claiming dependents can result in 1099 tax benefits, such as exemptions, credits and deductions. To qualify as a dependent child, certain criteria must be met:

• The child must be your biological, adopted, stepchild or foster child), sibling or a descendant of one of these (grandchild).
• The child must have the same principal residence as you for more than half the tax year. There are exceptions for temporary absences, such as education, illness, military service or vacation.
• The child must be under the age of 19 (or 24 if they’re a full-time student).
• You provide more than half of the dependent's total support during the tax year. Support includes food, housing, education, medical care and other necessities.

How does alimony work?

This all depends on when your divorce was officially finalized. The Tax Cuts and Jobs Act changed the way alimony is treated. If you were divorced before December 31, 2018, you could deduct alimony payments from your taxes as the payer, which were counted as income for the person receiving them.

If your divorce was finalized after December 31, 2018, the payments are no longer deductible or counted as income anymore.

Splitting assets

There are some important assets to consider when making a divorce settlement, and how those assets are allocated has some tax implications.  

Retirement accounts

If you need to split your retirement savings as part of the divorce agreement, this could result in penalties for withdrawing the funds early. The good news is that the IRS allows a qualified domestic relations order (QDRO), allowing the right for both parties to receive their portion of the retirement funds.

House

Quite possibly, the biggest asset in a divorce settlement is the house. If the home is sold as part of the settlement, up to a $500,000 gain from the home is exempt when filing jointly. This is only applicable if the home was your primary residence for at least two of the past five years.

Each spouse is entitled to a gain of $250,000 each. If you sell the home and are the only owner, you’re still entitled to half of the $500,000 gain.

Taxes are complicated, and the CPAs at FlyFin can help with everything tax-related, even navigating taxes during or after a divorce. They are available to offer unlimited advice and answer all your tax questions. A.I. also finds every possible deduction, saving you the most possible on taxes.