How does divorce affect taxes?
Well, that depends.
If you have an especially complicated situation, it may be helpful to loop in a financial adviser. Otherwise, the IRS has a helpful section on its website with information for recently divorced individuals.
An important consideration 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 stance on divorce and taxes
When it comes to filing your taxes, the IRS will still regard you as technically married during a tax year if you only initiated your divorce during that time but did not finalize it by Dec. 31.
Conversely, if your divorce decree was issued on Dec. 31, you’ll be considered unmarried for the whole year and won’t be permitted to file a married return.
Here’s how the IRS officially categorizes relationships for tax purposes:
- You’re still considered 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 divorced or separated on or before Dec. 31.
How to file taxes after divorce
You cannot simply file your taxes as "single" if your divorce or legal separation wasn’t finalized by the end of the tax year in question. That means by Dec. 31, 2021, for the upcoming 2022 tax season.
You have a few options for filing your taxes when you’re going through or have, in fact, just finalized a divorce.
If you’re technically still married in the eyes of the IRS, you can choose to submit your taxes as “married filing separately.” Some divorcing couples who are still together choose to file this way, but it will likely lead to you both paying more taxes.
With this option, you’ll both either have to take the standard deduction or itemize deductions. If one of you chooses to itemize, the other must do the same.
For the 2021 tax year, the standard deduction is $12,550.
If you itemize, you'll have to limit your deductions for mortgage interest and property taxes to what you personally contributed toward those expenses. The two of you will be allowed to split the write-off for any medical expenses that were paid through a joint account.
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.
But when you choose to file separately:
- You’ll be responsible only for your own return, and your own tax payments.
- If you’re owed a refund, you won’t have to split it with your ex, or soon-to-be-ex.
- If your spouse makes any errors or omissions on his or her return, you can’t be held legally responsible.
Though you may wind up paying a little more in taxes, plenty of separated and divorced individuals prefer to give up some of the tax credits they’d be entitled to, just to have 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 for the tax year in question, the two of 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 opt for this strategy to take advantage of a higher standard deduction when you combine your incomes on the same return. On 2021 tax returns, the standard deduction for couples filing jointly will be $25,100.
The deduction can significantly reduce taxable income if one spouse makes significantly more than the other, or if one spouse doesn’t work at all.
Filing jointly will give you access to certain tax credits such as the earned income tax credit or the child and dependent care credit.
Filing as head of household
If your divorce was finalized before Dec. 31 of the tax year, another option is to file as head of household.
This filing option allows you to claim a larger standard deduction — for 2021, that figure will be $18,800. This category also allows taxpayers to earn more income before they fall into a higher tax bracket.
Even if your divorce wasn't finalized by Dec. 31, you may still qualify as a head of household on your 2021 taxes. To meet the requirements, you and your spouse must have stopped living together during the first six months of the tax year, and you paid more than 50% of the cost of maintaining the family home for the year.
You’ll also need at least one dependent. Typically, that means a child, but other relatives also can fit the description.
If you claim head of household filing status, you’ll need to file a separate return from your former spouse.
Filing taxes after a divorce: Who can claim the kids?
Claiming your children as dependents can significantly reduce your tax liability.
However, when you divorce, only one parent can claim the kids as dependents and enjoy the associated tax benefits. It all comes down to which of you is the custodial parent.
Your divorce agreement should outline who is the custodial parent and who is the noncustodial parent. Generally, the custodial parent is the one the child lives with most days out of the year.
As the custodial parent, you’re eligible to claim your children as dependents, and take 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 the children as dependents. This requires a signed IRS Form 8332, which is a release form.
But note that submitting an 8332 means you can’t reclaim your dependent benefits until the next tax year.
Something else to keep in mind: The 2017 tax law signed by President Donald Trump introduced a new child tax credit worth $2,000 for each child under age 17. Then, President Joe Biden's COVID rescue package beefed up the credit for 2021 to $3,000 for each child between ages 6 and 17, and $3,600 for each kid under 6.
Biden's pandemic package made the 2021 credit fully refundable. So if the child tax credit brings your tax liability below zero, the IRS will send you a refund for up to $3,600 per child.
If you're a noncustodial parent, you're able to claim your children, for tax purposes, only if the custodial parent grants permission by signing a Form 8332.
The IRS is very clear that the form only allows a noncustodial parent to list the children as dependents. It cannot be used 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.
Prior to the 2017 tax overhaul, you would have been able to claim legal fees or expenses associated with your divorce. Now, those are considered personal expenses under the law and cannot be written off.
The 2017 law also barred spouses from deducting any alimony payments they make, and alimony recipients are no longer required to add the payments to their taxable income.
Meanwhile, recent changes in the tax code have improved some of the tax benefits for parents. The child tax credit may be a better deal than a tax deduction, because credits directly reduce your tax liability, while deductions only reduce your taxable 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.
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