Filing Taxes After Divorce
Divorce can be an exhausting process. Dividing assets, determining child custody, agreeing on spousal support and other determinations are a few of the details that must be resolved when divorcing. While taxes might not be top of mind when initially deciding to divorce, there are important considerations that affect your tax burden.
Your divorce agreement, sometimes called a Property Settlement Agreement or Marital Settlement Agreement, is a foundation for filing taxes after divorce. Hiring a divorce lawyer is an important first step when you decide to divorce. This attorney will be an important ally during your divorce to negotiate a settlement that leaves you in the best position financially while minimizing your tax liability.
What Steps Should I First Take?
Your attorney can best structure a favorable divorce agreement when you take the following steps. These documents are important for the divorce agreement and its accompanying tax exposure.
- Make copies of joint financial accounts and statements.
- Get your tax returns from previous years. Make two copies of your federal and state joint tax returns for the past several years. If you filed separately, make copies of both sets of returns.
- Gather your receipts, bills, credit card statements, deeds, valuations or other paperwork detailing and describing every asset you own or at least everything you can recall.
- Gather additional statements that fully describe your employee benefits as well as your spouse's.
- Gather all insurance policies, including life, health, disability, homeowners, renters or other coverage.
Do I Have to File Taxes with My Spouse if We Are Separated?
If you are separated from your spouse, the IRS still recognizes you as married. Your filing status is determined based upon what your marital status is on December 31st.
When separated, you have the same filing options you had when you were still living together:
- Married Filing Jointly
- Married Filing Separately
- Head of Household
The IRS recognizes “legal separation” and allows for those legally separated to file as Single, but marital status is determined by state law. Legal separation does not exist in Pennsylvania. If you are a Pennsylvania resident, you cannot legally file as Single.
Assuming one spouse makes more than the other, filing jointly is often the best option. Joint filing allows more of the higher income earner’s income to fall in a lower tax bracket and be taxed at a lower rate. This may result in lower collective tax liability. Be aware, though, that both spouses must agree to file jointly and must sign the paperwork together. Additionally, you both need to agree on how the refund or debt is divided between you.
If agreeing with your soon-to-be ex is impossible, you will choose the status of Married Filing Separately. Note that if your spouse itemizes their tax return, you also must itemize your tax return. Also, you can only claim half the child credits if the child is your dependent.
Another option when separated is to file as Head of Household. This status could be a favorable option, but there are distinct criteria that must be met. This status also is scrutinized more heavily by the IRS, so you want to be certain you meet the criteria.
A tax attorney can help you decide which status is most favorable to you depending on your unique circumstances.
How Do I File Taxes If I Divorced Mid-Year?
Since the IRS determines your filing status based on your marital status on the last day of the year, you will file as Single. In the eyes of the IRS, you weren’t married at all during that tax year and so you will be treated as Single. Remember, if you are employed, you need to update your W-4 so that appropriate taxes will be withheld.
When filing as Single, be aware that recent changes were made to tax code. Alimony payments from divorce agreements executed after 2018 cannot be deducted by the payer, nor are these payments considered income for the recipient. If the divorce agreement was finalized in 2018 or earlier, the payments are above-the-line deductions for the payer and considered income for the recipient.
The changes do not affect child support. Child support payments cannot be deducted, nor is it considered income. Only the custodial parent can claim a child as a dependent and claim the earned income tax credit.
Is There a Tax Break for Getting Divorced?
Getting a divorce is not a tactic to minimize your tax exposure. That said, you may have additional tax benefits if you are a custodial parent or considered Head of Household. Regardless of whether you are the custodial parent, you can include in your medical-expense deduction any medical expenses you pay for a child. Note that medical expenses are only deductible if they collectively exceed 7.5% of your adjusted gross income and if you have enough to itemize overall.
If property is transferred to you, the good news is you won’t pay taxes on that transfer. The not-so-good news is that if you sell that property later, you will pay the capital gains on any appreciation before and after the transfer.
Taxes and Divorce Are Complicated
Structuring a divorce agreement and its accompanying tax exposure is complex. An experienced lawyer can guide you in creating an agreement that you feel best serves your interest. Once an agreement is finalized, ensure that you are maximizing your tax benefits and minimizing your liabilities with the help of an experienced tax attorney or tax return preparation service.
Our experienced attorneys at Scaringi Law can help you.
To schedule a consultation, contact us online or via phone at (717) 775-7195.