Jo Willetts, EA
Director, Tax Resources
Published on: November 21, 2020
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There are a few things to consider when filing taxes after a divorce and it can be confusing. This article will help you organize what you need ahead of preparing your taxes this year and will give you some ideas on topics you should consider, such as:
First thing you need to do is determine your filing status. According to the IRS, couples are still married if their divorce isn’t final by December 31. Even couples who act divorced and live separately, but are still legally married, are considered married in the eyes of the IRS and tax code.
Couples in the process of getting a divorce or are separated may decide to file as Married Filing Separately. Each of you would file separate returns, only report individual income, and claim individual deductions, and credits. Even if only one of you earned income, you must both file your own returns. Similarly, you must both agree to either take the standard deduction or itemize deductions on your own returns. According to the IRS, when dividing itemized deductions: you may be able to claim itemized deductions on a separate return for certain expenses that you paid either separately or jointly with your spouse.
Couples that have not finalized their divorce may still file as Married Filing Jointly. This often results in lower taxes and possibly more credits and deductions than Married Filing Separately.
Additionally, you may be able to file as Head of Household if you had a dependent child living with you for at least six months, you paid for more than half of home expenses, and you didn’t live with your spouse for the last six months of the year.
If you have children and are going through divorce, there are many things you also need to consider for your taxes. The IRS allows the custodial parent of the child(ren) to claim them as dependent(s). The custodial parent is defined as the parent the child lives with for at least half the year. A child is defined as either a daughter, son, stepchild, foster child, sibling, step sibling, or a half sibling. The child must be under the age of 19, or under 24 if a student.
It’s important to know who can claim dependents as it will affect other tax credits. For example, if you’re the custodial parent you may be able to claim the Earned Income Tax Credit (EITC) as well as the credit for Child and Dependent Care Expenses. If you’re not the custodial parent, you cannot claim either.
Non-custodial parents can only claim dependent children for Child Tax Credit purposes if the custodial parent signs an IRS Form 8332, which is the Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent form. The release can be specified to apply for one year, a specific number of years, alternating years, or all future years. The release may be revoked in the future by filling out Part III of Form 8332. When revoking the claim, both parents need to attach Form 8332 to their tax return.
Otherwise, only the noncustodial parent attaches IRS Form 8332 to his or her tax return.
One of the biggest changes from the Tax Cuts and Jobs Act, or 2017 tax reform bill, was how alimony is treated on the tax return. Alimony payments are not automatic and must be defined in a divorce agreement. Alimony, or spousal support, payments are considered income to the recipient and a deduction to the payer for agreements entered prior to 2019. Payments based on agreements entered, or with certain modifications made after, 2018 do not require the recipient to report the income nor does it allow the payer to deduct the income.
The IRS defines alimony payments as cash payments and must be specifically stated as alimony or spousal support in a divorce or separation agreement.
Child support has never been tax deductible and the recipient doesn’t pay income tax on the payment. Child support is meant to benefit children and is known as a tax-neutral exchange of money.
Divorced couples often sell their home, either because they couldn’t agree who should keep it or it’s not a good financial decision to otherwise hold on to it anymore. If the home sells for a profit, it will likely have implications for both your taxes because it’s a capital gain. But many divorced couples qualify for a partial exclusion of the capital gains if they satisfy the “two-year ownership and use” test, which requires the taxpayer(s) to live in and own the home for two of the previous five years. The two years does not have to be the same time frame for each test. For sales after a divorce, if the two-year ownership-and-use tests are met, you may both be able exclude up to $250,000 of gain on your individual returns. But if the tests aren’t met, the amount of exclusion will depend on how the home was used.
Retirement savings also need to be considered when filing after divorce. If a retirement fund, like a traditional 401(k), is cashed out, the IRS considers it taxable income. In order to make a tax-free transfer to a former spouse, a Qualified Domestic Relations Order (QDRO) must be part of the divorce. The QDRO allows the taxpayer to transfer the proceeds to the (ex-)spouse’s retirement account or IRA tax-free.
About the Author
Jo Willetts, Director of Tax Resources at Jackson Hewitt, has more than 35 years of experience in the tax industry. As an Enrolled Agent, Jo has attained the highest level of certification for a tax professional. She began her career at Jackson Hewitt as a Tax Pro, working her way up to General Manager of a franchise store. In her current role, Jo provides expert knowledge company-wide to ensure that tax information distributed through all Jackson Hewitt channels is current and accurate.