As Neil Sedaka once said, “Breaking up is hard to do.” Not only do you have to deal with the emotional rollercoaster, but also the logistical nightmare of separating your lives. This includes your physical belongings, your home, and your taxes. When it comes to divorce and taxes, one of the first things you should do is update your Formulario W-4 with your employer within 10 days of your divorce or separation. This will ensure your withholding is correct. Your next tax preparation steps, however, will depend on your specific situation. For most taxpayers, these are the things you’ll need to consider.
Determine Which Filing Status to Use
When it’s time to file your taxes, it could get a bit tricky if you recently separated or divorced. That’s because the IRS will treat you as married if your divorce wasn’t finalized by the end of the tax year. Depending on your situation, you may be able to use one or more of the following filing statuses.
- Single. If your final decree of divorce or separate maintenance was issued by December 31, you may file as single for the tax year. This is typically used if you don’t have any children and haven’t remarried.
- Head of Household (HOH). You may qualify for HOH filing status if all of the following apply:
- Your ex-spouse did not live in your home for the last 6 months of the year;
- You paid more than half of the cost to keep up your home for the year; and
- It’s the main home of your dependent child(ren) for more than half of the year.
- Married Filing Jointly. Although you are no longer with your spouse, you can take advantage of the tax breaks by filing jointly if you were still legally married by the end of the year.
- Married Filing Separately. There are some instances where filing separately can benefit you, however, especially if you earned significantly less than your ex-spouse.
It’s best to weigh the pros and cons of each filing status to determine which is best for your situation. You can also use the “What’s My Filing Status” tool on IRS.gov if you need help figuring out which status makes the most sense for you.
Understand The Treatment of Alimony & Separate Maintenance
Once you determine your filing status, you’ll also need to understand how alimony and separate maintenance payments are treated for tax purposes. Prior to 2018, alimony and separate maintenance payments were deductible by the paying spouse. Payments under these agreements were also considered income for the spouse who received them. Agreements executed after 2018 or modified after 2019, however, do not follow these rules. Neither you nor your spouse can deduct payments or include them as income.
Divorce and Taxes: Who Will Claim Dependents?
The tax treatment of children, unfortunately, is not as easy as dealing with alimony or support. Determining who gets to claim them can get a bit tricky, especially if you split custody fifty-fifty and file separate returns. You can’t share the tax benefits, so it’s important to designate which parent will include them on their return.
Generally, custodial parents have the right to claim a dependent on their return. This is due to the residency test, which states a dependent must live with you for more than half of the tax year. If the child lived with you and your ex-spouse for equal amounts of time, whoever has the higher adjusted gross income is considered the custodial parent.
There are, however, some instances where a non-custodial parent may be eligible to claim a qualifying child. For example, the custodial parent can complete Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. If you’re the non-custodial parent, you’ll submit Form 8332 with your tax return. This allows you to claim certain tax benefits, such as the Child Tax Credit or Credit for Other Dependents. You cannot, however, claim HOH filing status or receive the Dependent Care Credit.
Be sure that only you or your spouse claims the qualifying child on your tax return. If the child is claimed on more than one return, it will significantly slow processing time while the IRS determines who has the right to claim them.
Get Tax Help
If you’re recently separated or divorced, we strongly recommend reading IRS Publication 504. It covers general filing information and can help you determine which exemptions you are eligible to claim, including those related to dependents. It may also be beneficial to consult with a tax professional. They can help you decide which filing status makes sense for your situation and help you take advantage of any tax deductions or credits you are eligible to receive. For a free consultation, call Tax Defense Network at 855-476-6920.