There are myriad details to consider when getting a divorce. One of the biggest concerns involved taxes. The tax implications of divorce are difficult to understand until you are trying to file your taxes. While it can be difficult to prepare for every situation you may encounter during your divorce, understanding the potential impact on your taxes can help you avoid unpleasant surprises at tax time.
Here are few things to think about before you file your tax return if you are divorced.
Unmarried or head of household?
Your filing status depends on whether you were still married on December 31 of the tax year. If you were married on December 31, you must file as a married person even if your divorce becomes final before you file your tax returns. If you’re divorced on December 31, you should file as either unmarried or as head of household, if you are the custodial parent or responsible for maintaining a home for your child for at least half the year.
Who claims the children?
The custodial parent typically claims the children as dependents. Currently, the exemption allowed for one dependent child is $4,050 unless your income is over $287,650. If custody is shared, the exemption usually is too. For two or more children, divorcing couples might designate which parent gets to claim which child. When there is one child, the exemption can be granted in alternating years. The custodial parent is eligible for a Child Care Tax Credit and an Earned Income Credit. However, these tax credits can be negotiated to realize their full advantage. If you’re not eligible for a credit due to your income it might be advantageous to allow your ex-spouse to take it.
Who gets the real estate tax benefit?
Two things to consider with regard to your home are mortgage interest deductions and real estate taxes. If you end up with the house and mortgage you’ll likely end up with the related tax deductions. Divorced couples who share ownership of the home and/or split the mortgage payments may also share the related deductions. Make sure this is made clear in your divorce settlement as it can have a significant impact on your tax bill.
What about investments and income?
If you’re splitting a 401(k), you’ll be subject to the terms of a Qualified Domestic Relations Order (QDRO). This allows part of the 401(k) to be split into a separate account that maintains the original account’s tax-advantageous status but splits any tax liability going forward. Additionally, your income will change post-divorce, so be sure to take that into account when thinking about taxes, budgeting and retirement savings.
Your post-divorce tax obligations will ultimately depend on specific provisions of your settlement that will be decided on during the negotiation phase of your divorce. Working with a divorce attorney can help you understand the specific impact on your taxes and what steps you can take to get the most out of our tax return.