How Filing Taxes Affects Couples Going Through Divorce
Navigating Taxes During Divorce: What You Need to Know
Divorce is already a challenging process, and adding taxes to the mix can make it even more complex. Filing taxes during or after a divorce requires careful planning and an understanding of how marital changes impact your tax situation. From determining your filing status to deciding who claims the kids, here’s a comprehensive guide to how taxes affect a divorcing couple.
1. Filing Status: A Crucial Decision
Your marital status on December 31 determines how you file your taxes for the entire year. The IRS considers you married or single as of the last day of the year, no matter when the divorce proceedings started.
- If You’re Divorced by December 31: You’ll file as single or, if you qualify, head of household. Head of household status is available if you paid more than half of the household expenses and a dependent lived with you for more than half the year.
- If You’re Still Legally Married by December 31: You must file as married filing jointly or married filing separately. Filing jointly often provides better tax benefits, like lower tax rates and higher deductions, but it requires cooperation and shared financial transparency. Filing separately limits liability for your spouse’s income or deductions but can result in a higher tax bill.
Choosing the right filing status is critical, and it may depend on your level of cooperation with your spouse during the divorce process.
2. Who Claims the Children?
Deciding who claims the children on their taxes is one of the most common tax-related issues during divorce.
- IRS Rules: Only one parent can claim a child as a dependent in any given tax year. This parent may qualify for tax benefits like the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit.
- Divorce Agreements: Often, divorce agreements specify who claims the children. Sometimes parents agree to alternate years or split claims if there are multiple children.
If this isn’t decided beforehand, disputes can arise, which is why it’s important to address this issue during the divorce process, ideally through mediation.
3. Alimony and Child Support: Key Differences
The Tax Cuts and Jobs Act of 2017 brought significant changes to how alimony is taxed.
- Alimony Payments: For divorces finalized after December 31, 2018, alimony payments are no longer deductible for the payer, nor are they considered taxable income for the recipient. For divorces finalized before this date, the old rules still apply, where alimony is deductible and taxable.
- Child Support: Child support payments are neither deductible by the payer nor taxable to the recipient. This means child support has no direct impact on your taxes.
Understanding these distinctions is important when negotiating spousal and child support during divorce mediation.
4. Division of Assets: Tax Implications
Dividing assets during a divorce can have significant tax consequences, especially with property and retirement accounts.
- Retirement Accounts: Dividing retirement accounts like IRAs or 401(k)s can result in early withdrawal penalties if not handled correctly. A Qualified Domestic Relations Order (QDRO) is often used to avoid penalties when dividing these accounts.
- Selling Property: If you sell your marital home, you may face capital gains taxes depending on the profit and whether you meet the IRS exclusion criteria. For example, if you lived in the home for at least two of the last five years, you can exclude up to $250,000 ($500,000 if filing jointly) of capital gains.
Asset division requires careful planning to avoid unnecessary taxes and penalties.
5. Joint vs. Separate Filing
If you’re still legally married, you’ll need to decide whether to file jointly or separately.
- Benefits of Filing Jointly: Lower tax rates, higher standard deductions, and access to more tax credits. However, both spouses are jointly responsible for any errors or taxes owed.
- Filing Separately: This limits liability to your own income and deductions, but it often results in higher taxes. It’s a safer choice if you suspect your spouse is hiding income or claiming questionable deductions.
This decision should be made with the help of a financial advisor or tax professional.
6. Timing Matters
The timing of your divorce can impact your tax situation significantly. If your divorce is finalized by December 31, you’ll file as single or head of household for the entire year. Delaying the finalization until January allows you to file jointly for one more year, which can result in tax savings.
7. Why Mediation Can Help
Mediation provides a collaborative space to discuss and resolve tax-related issues before they become problems. Working with a mediator ensures both parties understand their financial obligations and make informed decisions about:
- Filing status
- Dependency claims
- Asset division
- Spousal and child support
Mediation can help avoid future disputes and provide clarity for both parties moving forward.
8. Consult a Professional
Taxes are complicated, and divorce adds an extra layer of complexity. A tax professional or financial advisor can help you navigate these challenges, ensure compliance with tax laws, and identify opportunities for savings.
Divorce is difficult enough without tax complications adding to the stress. By addressing tax-related issues early and working collaboratively, you can avoid costly mistakes and focus on building a stable financial future. Mediation is an effective way to ensure these decisions are made with clarity and fairness, so both parties can move forward confidently.
📞 Need help navigating divorce and taxes? Contact Comeiro Mediation today to schedule a consultation and take the first step toward a peaceful resolution.