Note: The Law Office of Sandra Guzman-Salvado are not tax professionals, and this is not meant to serve as tax advice. Please see a licensed accountant for specific advice for your situation.
Even in the best of circumstances, taxes can be confusing. The process becomes much more complicated when you’re going through a divorce or separation.
Any major changes to your lifestyle will change what and how you file. The case of a separation includes a new marital status, splitting childcare responsibilities, and transferring assets.
Here are 6 things you need to know about filing taxes during and after your divorce.
1. Understand Your Filing Status
The first step to filing your taxes correctly after a divorce is to understand your filing status. This depends on the date on which your divorce was finalized.
Your marital status on December 31st of the previous year will be your official marital status for tax purposes. If you are separated, but still legally married by the end of the year, you can still file a joint return. This option will likely save both partners money.
Alternatively, you can choose married filing separate status, but it may impact how much you owe or the size of your refund.
If you were officially divorced by the last day of the year, you can file as a single taxpayer or as head of household. You will only qualify as head of household if you meet the following requirements:
- You were unmarried (single, divorced, or legally separated) on December 31st.
- You paid more than half of the costs of home upkeep for the tax year, including real estate taxes, home insurance, repairs, utilities, and food.
- You lived with a qualifying dependent for at least six months of the year.
2. Update Your W-4
If you are employed, you will also need to update your W-4. This document directs your employer on how much to withhold from your paycheck.
Married couples who are joint filers typically split their W-4 withholding between both spouses. After a divorce, you will need to adjust how much is withheld from your income alone.
The updated W-4 will also need to include your new marital status.
3. Claiming Dependents
Only one parent can claim deductions for qualifying dependents. Typically, this is the parent with primary custody, or the parent with whom the children spend over half the year.
However, this is not always the case. If the non-custodial parent wishes to claim the child tax credit, they can do so by filing Form 8332. This is an agreement between the parents describing to the IRS who will claim the dependents.
If your ex is refusing to cooperate, you could always try to file with the dependency exemption first. Your spouse’s return will be denied if they claim the same exemptions.
4. Deduction Rules
If you are paying child support, you cannot use these payments to receive a deduction. On the flip side, if you receive child support, you do not have to report it as income on your tax return.
Starting on January 1st, 2019, the rules for taxing and deducting alimony changed to match the rules for child support. For all divorces finalized before this date, alimony payments were deductible for the giver and taxable for the receiver.
For all divorces finalized after December 31st, 2018, paid alimony is non-deductible on your taxes. Similarly, for the recipient, this money does not need to be claimed as income because it is non-taxable.
If you pay for the medical care of a child, even as a non-custodial parent, this can be deductible if your total deductions exceed the standard deduction and you opt to itemize.
5. Home Sales & Transfers
If you are planning to sell your home, it may be beneficial to do so while you’re still legally married. This is because the IRS allows couples filing jointly to exclude up to $500,000 of gain on the sale.
After the divorce, if you’re filing separately, you and your ex can still exclude up to $250,000 of gain on your individual returns.
Keep in mind that, in order to qualify for either of these exemptions, you must have owned the home and lived there for at least two years out of the last five.
If you are planning to transfer the entire home ownership to one spouse, the recipient doesn’t pay tax on that transfer. However, if the recipient later sells that property, he or she will need to pay capital gains tax on all the appreciation before, as well as after, the transfer. So before you choose this option, it is important to consider how the tax basis will shift compared to the value of the property.
When in doubt about this or any of the tax issues we discussed above, speak to a tax professional.
Maryland Divorce Attorney
If you’re currently going through a divorce, navigating finances is probably the last thing you want to deal with.
Here at the Law Offices of Sandra Guzman-Salvado, we understand that. That’s why we offer our expertise in family law to help you through the process. We are proud to serve Rockville, Maryland, and the surrounding areas with our diverse and Spanish-speaking team.
Call now to learn more.