Divorce presents spouses with many challenges. From the emotional toll to the need to itemize every asset owned, spouses can feel stress, anxiety and considerable worry. The last thing on the mind of many divorcing couples are taxes, but this would be in error.
When a couple divorces, their tax status changes in several ways. These issues can sneak up on recently divorced individuals when tax season finally comes around. Understanding how to navigate these unfamiliar qualifications can help spouses not overpay their taxes.
Changes to tax status
One of the most significant changes ex-spouses will have on their tax returns is filing as ‘single.’ Those divorced by the last day of the calendar year must file as single or head of household. Individuals can use these statuses if they have a legally binding separation agreement or if the couple lived apart for the last six months of the taxable year. Those still married on December 31 must file as ‘married filing jointly’ or ‘married filing separately.’ Though filing separately may limit tax benefits, the Internal Revenue Service (IRS) recommends it for couples who have problems with trust. Generally, those filing jointly or as head of household will receive greater benefits.
For families facing divorce, the IRS assumes the parent with primary custody will claim the dependent exemptions on their return. Families with more than one child can explore options for dividing the exemptions. If the parent with the higher income declares the dependents, they might enjoy a larger tax break.
Alimony and child support come with tax implications as well. A payer can deduct alimony from their taxes, but not child support. For the recipient, the IRS considers alimony as taxable income.
When dividing assets, spouses have an opportunity to transfer property between them tax-free. Be careful when choosing which assets to keep. Assets like houses or capital gains can produce income when sold, which can be financially challenging come tax season.
Consult with a lawyer
Spouses considering divorce have found success working with a local attorney familiar with family law and taxes. A lawyer can help spouses organize their financial information and draft comprehensive property division and parenting agreements.