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Whether you’ve been married five years or 55 hours (à la Britney Spears), when your marriage ends, your tax situation changes.
But while divorce ends your legal marriage, it doesn’t terminate your or your ex’s obligation to pay your fair share of federal income tax. If your divorce is final by Dec. 31 of the tax-filing year, the IRS will consider you unmarried for the entire year and you won’t be able to file a joint return.
When it comes to your taxes, here are some things you’ll need to consider after divorce.
- Choosing a new filing status
- Deciding who claims dependent children
- Reporting alimony and child support
- Handling a home sale
- Sharing retirement accounts
- Deducting legal fees
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If you’re no longer married, you can’t file your federal income taxes with a status of “married filing jointly” or even “married filing separately.” You’ll need to choose between “single” or “head of household,” depending on how you qualify.
Filing as head of household has some big benefits compared to filing as single, including a higher standard deduction, eligibility for some valuable tax credits, and often a lower tax rate. But you can only file as head of household if …
- You’re not considered married as of Dec. 31 of the year for which you’re filing the tax return.
- You paid at least half the cost of keeping up a home during the year in which you’re filing.
- You have a “qualifying person” who either lived with you for at least half the year or who meets other specific requirements, including being temporarily absent for specific reasons. Some examples are children attending school, married children you claim as dependents, or qualifying parents you support and claim as dependents even if they don’t live with you.
After divorce, you and your ex can’t both file as head of household based on shared support and care for the same child or children. Children can count as qualifying persons only for the custodial parent, the parent that the child lives with for most of the year. If both parents share the child for an equal amount of time, the parent whose adjusted gross income is higher can claim the child for the purposes of filing as head of household. Keep in mind, divorce decrees typically establish who is the custodial parent.
The noncustodial parent (the parent that the child lives with for a shorter amount of time) can’t use the child to claim head-of-household status. Even if the custodial parent releases the right to claim the child by signing IRS Form 8332 (which allows the noncustodial parent to claim the child as a dependent), there’s no exception for head-of-household status.
Speaking of claiming children as dependents — only one parent gets to do that when filing taxes after divorce. Typically, the parent who gets the deduction is the custodial parent. But as we mentioned, an exception can be made using Form 8332, which is signed by the custodial parent (releasing that parent’s claim) and filed with the noncustodial parent’s taxes.
You may be wondering why the claim matters, since the Tax Cuts and Jobs Act signed into law in 2017 suspended the dependency exemption. Before the Tax Cuts and Jobs Act, taxpayers could deduct up to $4,050 from taxable income for each dependent. That deduction will not be available again until Jan. 1, 2026.
But it still benefits a custodial parent to claim a child as a dependent both to get head-of-household status and to become eligible for certain tax credits and other deductions, such as …
- The child tax credit, which is $2,000 per qualifying child in 2018
- A tax credit for child care and dependent care expenses
- The earned income tax credit
- The American opportunity tax credit for qualified education expenses
Because a noncustodial parent won’t be able to claim head-of-household status if gaining the right to claim a child as a dependent, and with tax reform eliminating the dependent deduction, there’s not much incentive to negotiate the arrangement. To claim the tax credits that remain, you’d need to actually be the custodial parent and claim your child as a dependent.What is the earned income tax credit? Learn more
As part of your divorce decree, you may agree to pay your ex-spouse alimony. Or you may be required to pay child support. Whenever money changes hands in either situation, it’s important to understand the potential impact on your taxes.
Whether you can deduct alimony you pay, or must include alimony payments you receive as gross income, depends on when your divorce was finalized.
If you divorce by the end of this year (Dec. 31, 2018), you can deduct alimony you’ve paid from your taxable income in 2018. If you receive alimony as part of a divorce agreement prior to Dec. 31, 2018, you’ll need to report it as income for the year.
However, tax reform has changed how the IRS treats alimony. For divorces finalized after Dec. 31, 2018, you won’t be able to deduct any alimony you pay. But if you’re the recipient of alimony, you won’t have to include those payments in your taxable income.
As for child support, it’s never been tax deductible and wasn’t ever considered income for tax purposes. Tax reform didn’t change that.
Divorce typically means separating your home into two households — that can include selling your house. Divorcing couples may decide to sell a house for a number of reasons — perhaps because neither can afford it independently or they can’t agree who should keep it.
If you sell your home at a profit, this might have implications for your taxes, as you could owe capital gains taxes on your portion of the profit. But many divorcing couples qualify to exclude part of those gains, which helps to avoid getting hit with a big tax bill.
If you owned your house and used it as your main home for two of the five years before selling, and haven’t excluded capital gains from the sale of any other house within the previous two years, you could exclude up to $500,000 in gains if you sell the house while you still file a joint return.
If you’re already divorced and both spouses end up with partial ownership of the home, each could exclude up to $250,000 in gains. Of course, if only one of you ends up owning the house, that person could exclude just $250,000 as a single filer, half the amount of the joint-filing and dual-ownership exclusions.
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There’s another key issue that arises in divorce settlements: What happens to retirement plans?
In many cases, couples must divide retirement benefits when a marriage ends. One spouse may be entitled to a share of the other’s workplace pension, for example. But companies won’t pay pension money immediately, so both ex-spouses will have to wait to get their fair share.
To solve this problem, the divorce court may issue a domestic relations order, or a qualified domestic relations order, as it’s also called. QDROs provide instructions to pension plan administrators, specifying that part of a pension needs to be paid to an alternate payee: the ex-spouse.
QDROs need to be specific about who will receive payments, the schedule for when those payments will be made, and the percentage or amount of benefits that are to be paid to the alternate payee.
Finally, another key issue to consider when filing taxes after divorce: Whether you can take a tax deduction for all those expensive legal fees you had to pay to end your marriage. Unfortunately, the answer is probably no. Legal fees aren’t tax deductible.
And although previously you might have been able to deduct legal fees you paid for tax advice in connection with getting a divorce or to get alimony, tax reform has changed things. That type of expense was subject to the 2% floor, meaning you could only deduct it if the total of your itemized expenses exceeded 2% of your adjusted gross income.
But the Tax Cut and Jobs Act has suspended 2% deductions until Jan. 1, 2026.
There’s probably no good way to calculate the emotional costs of ending a marriage, but you can take steps to ensure that filing taxes after divorce goes as smoothly as possible. Notify the IRS of your new filing status, make sure you and your ex are clear on who gets to claim children as dependents, and plan for any capital gains you may realize on the sale of a home.