How does divorce affect taxes?
Well, that depends.
If you have an especially complicated situation, it may be helpful to loop in a financial advisor. Otherwise, the IRS has a helpful section on its website where it provides information for recently divorced individuals.
One of the most recent changes to tax law relating to divorce is that the IRS’s Form W-4 no longer uses your personal allowance to calculate your income tax withholding.
That means if you had been claiming a personal allowance for your spouse before you divorced or legally separated, you’ll have to give your employer a new W-4 within 10 days of the divorce or separation.
Another important factor is whether you’re actually divorced in the eyes of the IRS. Although your relationship may be officially (and legally) over, it’s not always so straightforward for the Internal Revenue Service.
The IRS’s stance on divorce and tax
When it comes to filing your taxes, even if you initiated your divorce last year, unless it was finalized by December 31 of that tax year, the IRS will still regard you as technically married.
And conversely, if your divorce decree was issued by December 31, you’ll be considered unmarried for the whole year and won’t be permitted to file a married return.
It may sound complicated, but here’s how the IRS officially categorizes relationships:
- You’re still married unless you have a court order that states you’re divorced or legally separated, even if you’re living apart on your own terms.
- You’re no longer married if you’re officially separated on or before December 31.
How to file taxes after divorce
You have a few options for filing your taxes when you’re going through or have just finalized a divorce and they include:
- Filing separately.
- Filing jointly.
Either way, you cannot simply file your taxes as “single” if it wasn’t finalized before December 31 of the tax year in question (December 31 2020 for 2021 tax season).
If you’re technically still married under the eyes of the IRS, you can choose to file as “married filing separately.” Some couples who are still together choose to file this way for tax purposes, but it will likely lead to you both paying more taxes.
With this option, you’ll both either have to take on the standard deduction or itemize your deductions. However, if one of you chooses to itemize, the other will have to as well.
For the 2020 tax year, the standard deduction is $12,400.
On your return, you’ll have to limit your itemized deductions like mortgage interest and property taxes to what you personally contributed for them. As for medical expenses that were paid through a joint account, you’ll be allowed to split them.
Filing separately means you’ll lose the chance to claim earned income and higher education tax credits as well as a few other tax breaks the IRS offers.
On the other hand, when you choose to file separately, you’ll only be responsible for your own return and thus your own tax payments. And if you’re owed a refund, you won’t have to split that either.
Plus, if your spouse makes any errors or omissions on their return, you can’t be held legally responsible if you’ve filed separately.
Let’s say your spouse makes significantly more money than you. If they fail to pay taxes on that income, the IRS may come after you to pay it.
While you may pay a little more, plenty of separated and divorced individuals prefer to give up some of the tax credits they’d be entitled to for the peace of mind of not being legally tied to their ex’s return.
Couples who are not yet divorced filing taxes jointly
If the IRS still views you as married, you may decide to file a joint return. Even if you no longer live together, you can select the “married filing jointly” option.
You may want to pursue this option to take advantage of a higher standard deduction when you combine your incomes on the same return.
If you’re filing a joint return, the standard deduction is $24,800.
While it comes out as even to file separately if you make similar incomes, if one spouse makes significantly more than the other (or maybe one doesn’t work at all), then that deduction can significantly reduce your taxable income.
Filing as head of household
If your divorce was finalized before December 31 of the tax year in question, another option is to file as head of household.
This filing option allows you to claim a larger standard deduction — in 2020, that figure is $18,650. This category also allows taxpayers to earn more income before they’re classified in a higher tax bracket as well.
Even if your divorce isn’t finalized by December 31, you may still qualify as head of household. To meet the requirements, you and your spouse will have to have stopped living together in the first six months of the tax year but you still paid more than 50% of the cost of maintaining your home for the year.
You’ll also need to have a dependent. Typically, that means a child, but there are other relatives who can fit that description as well.
Finally, if you claim head of household filing status, you’ll have to file separate returns from your former spouse.
Filing taxes after a divorce: who gets to claim the kids?
Claiming your children as dependents can significantly help reduce your tax liability.
However, when you get divorced, only one parent can claim the kids as their dependents and benefit from the associated tax credits. Who gets to claim them will come down to who is the custodial parent.
Your divorce agreement should outline who the custodial and non-custodial parents are. enerally, the custodial parent is the one who the child lives with for the most days out of the year.
As the custodial parent, you’re eligible to claim your children as dependents as well as the Earned Income Tax Credit and the Child and Dependent Care Credit.
The custodial parent does have the option to allow the noncustodial parent the right to claim their children as dependents. This requires signing the IRS’s Form 8332, which is a release form.
But note that filling that out means you can’t reclaim your dependent benefits until the next tax year.
Keep in mind as well that changes as a result of the 2017 Tax Cuts and Jobs Act, a new Child Tax Credit was introduced that’s worth $2,000 per child under 17 years of age.
The 2017 legislation made the credit refundable for up to $1,400. So if the CTC brings your tax liability below zero, the IRS will send you a refund for the credit of up to $1,400.
As the noncustodial parent, you’ll only be able to claim your children as dependents if the custodial parent grants you permission. This involves having the custodial parent sign a Form 8332 and it to your tax return.
The IRS is very clear that while the noncustodial parent can claim the child tax benefit of with this method, they cannot use the same form to claim head of household filing status, the earned income credit, the credit for child and dependent care expenses, the exclusion for dependent care benefits or the health coverage tax credit.
Can I claim legal expenses on my taxes after divorce?
The answer is a fairly resounding no.
The 2017 Tax Cuts and Jobs Act made it so that as of 2019, you can no longer deduct alimony payments and the receiver of those alimony payments does not have to add the payment to their taxable income.
The TCJA also impacts how you can handle divorce expenses. Prior to the act, you would have been able to claim legal fees or expenses associated with your divorce. Now, they’re considered personal expenses under the law and therefore cannot be claimed.
However, while you could previously claim a dependency exemption (which worked like a tax deduction) for every child you financially support, that doesn’t mean the government did away with all the tax benefits for parents.
The $2,000 Child Tax Credit may work even more in your favor as a taxpayer than a tax deduction. That’s because credits directly reduce your tax liability, while deductions only reduce your income.
Whether you file jointly, separately or as head of household this year, make sure you’re maximizing this credit and minimizing your tax liability.