Divorce changes almost every aspect of your life, but most people are not adequately prepared for how their divorce affects their income taxes. Whether you are in the process of getting a divorce or sitting down to file your income taxes after being recently divorced, here are some things you should know about how divorce affects your income taxes.
Divorce May Change Your Filing Status
During your marriage, you and your spouse likely filed your income taxes as “married, filing jointly.” People divorced on or before December 31, 2019, are no longer eligible for that status. Your filing status options are either “single” or “head of household” per your qualifications. Typically, filing as head of household offers more benefits, but you must be eligible to qualify for that status. To file as head of household, you must meet these qualifications:
- Be a U.S. citizen or resident for the entire current tax year.
- Be unmarried by the end of the tax year.
- Maintain a household for a dependent child or relative.
- Reside in the household, the qualifying dependent relative’s home, for over half the year.
- Be financially responsible for more than half the cost of maintaining the household.
Some of these aspects can get tricky for people who co-parent children where the dependents spend time in two different residences. If possible, consult your tax management professional during your divorce negotiations to determine your options.
Spousal Maintenance And Income Tax Impact
As of 2018, if you have a new order for spousal alimony, including a recent divorce decree, the person paying spousal maintenance (alimony) pays taxes on those funds, not the person receiving it. The federal government typically taxes alimony payers at a higher rate than recipients. This fact may play a role in your divorce negotiations, so it is a good idea to discuss your best options with your financial advisor.
Why Consider Claiming Your Kids On Your Tax Return
Typically, the parent with custody of the children has a legal right to claim them on income taxes, but they can transfer it to the other parent. In the past, these tax exemptions may have been used as bargaining chips in a divorce, but now, the IRS sets the exemption at $0, which affects your wallet.
Still, there are advantages of claiming your child as a dependent on your tax return. The Child Tax Credit (CTC) can be claimed by the eligible parent who claims a child as a dependent. Claiming a dependent on your tax return may also grant you Child and Dependent Care Credit and Earned Income Tax Credit (EITC) per your eligibility.
Consulting Your Tax Professional About Tax Impact Of Divorce
If you are recently divorced or in the process of getting divorced, it is most likely in your best interest to consult your tax professional about how the divorce may impact your income taxes. The more you know about your options, the better you can make decisions that will affect your financial future.