How Divorce Impacts Your Taxes

Are you going through a divorce or legal separation? Unfortunately, the tax implications of divorce aren’t as simple as filing separate returns. In fact, there are changes to most aspects of your tax return, including your filing status and credit and deduction claiming ability. Additionally, there are potential tax consequences from joint-issued forms and transferred property.

In this article, we’ll dive into how divorce impacts your taxes. This article isn’t a substitute for professional advice. If you have any specific questions or concerns about your tax situation, reach out to your team right away. 

Filing Status

One of the top changes when going through a divorce is your filing status. Until your divorce or legal separation is final, you and your spouse will be considered a married couple. However, you can choose married filing separate status. Married filing separate status can be tricky when joint tax forms are issued. Remember, if you continue to file as a married couple, any tax liabilities will be jointly shared.

If you have qualifying dependents, you may be eligible for the head of household filing status. This filing status comes with a larger standard deduction and different phase-out limitations for credits and deductions. Your divorce agreement should outline who claims the children for tax purposes.

Credit and Deduction Eligibility

Your filing status impacts a variety of credits and deductions. For example, the standard deduction is different for each filing status. Similarly, the phase-out range for credits and other deductions depends on your filing status. If you are going through a divorce or legal separation, it’s important to be aware of how your credits and deductions will change.

It’s important to keep in mind the impact that children have on your taxes. There are numerous credits and deductions available to parents, including the Child Tax Credit and education deductions. For example, it’s common for parents to alternate who claims children each year.

In years that you are not eligible to claim your children, you can expect your refund to drop.

Let’s say you have two qualifying children and your income is below the limit for the Child Tax Credit. This creates a credit of $4,000, which results in huge tax savings. However, these tax savings are only every other year, making it important to plan for years of lower refunds. Your divorce or separation agreement should include provisions that specify which parent claims children each year.

Tax Forms

Another tax implication of divorce to be aware of is the issuance of tax forms. Tax forms, such as 1099s, are reported based on the identifying number. For example, if you receive a 1099 with your Social Security Number, it should be reported on your tax return. However, divorce and legal separation can make this tricky, especially if custodians haven’t switched ownership prior to issuing year-end forms.

When navigating the first year post-divorce or legal separation, it’s important to pay close attention to the identifying numbers on tax forms received. Even if the identifying number is incorrect, you should follow your divorce agreement. Similarly, joint ownership assets should be split. For example, property taxes paid on a marital home should be split if each spouse retains an ownership interest.

Transferred Property

Most divorces will have asset separation. The IRS typically does not consider asset ownership transfers as a taxable event during divorce proceedings. However, all property and asset transfers should be laid out in your divorce or separation agreement and distributed within one year of marriage dissolution to avoid any issues.

Remember, ownership transfers are not taxable, but liquidation might be. For example, moving custody of an IRA account into your spouse’s name might not trigger any tax implications, but liquidating the IRA and transferring cash would.

Moreover, it’s important to understand the tax treatment of a marital home. During the divorce process, one spouse generally sells their portion of the house to the other spouse. This is a taxable event; however, you may be able to claim certain exemptions to lower your capital gains.

Summary

Divorce and legal separation can be complex to navigate, especially when it comes to filing your income tax returns. Working with a qualified team is the best way to ensure accuracy in your filings.