Divorce is never easy, and navigating the financial aftermath can be overwhelming. One area that often catches divorcees off guard is the impact of divorce on their taxes. Whether you’re newly divorced or have been separated for some time, it’s crucial to understand how your tax status changes and what steps you need to take to avoid unexpected surprises at tax time. In this blog, we’ll walk through the key tax considerations for divorcees, how to prepare for your first post-divorce tax season, and real-life examples of how expert guidance can help you avoid common pitfalls.
How Divorce Changes Your Tax Status
One of the first things to understand is how your tax status is impacted by divorce. Your filing status, eligibility for child tax credits, and how alimony/spousal support is handled can all be affected by your new situation.
1. Filing Status
When you’re married, you typically file as “Married Filing Jointly” or “Married Filing Separately.” However, once you’re divorced, your filing status changes to “Single” or “Head of Household” (if you qualify).
-- Single Filing Status: This is the most common status for divorcees. You’ll file as “Single” if you do not meet the requirements for “Head of Household.”
-- Head of Household Filing Status: If you are the custodial parent of a child or dependent and provide more than half of their support, you may qualify for the more favorable “Head of Household” status. This filing status comes with higher standard deductions and can provide a significant tax break.
It’s important to note that you cannot file jointly with your ex-spouse once the divorce is final. Many divorcees are surprised by this, especially if they previously enjoyed the tax benefits of filing jointly. Understanding your filing status is essential because it impacts everything from your tax brackets to your eligibility for various tax credits.
2. Child Tax Credits
If you have children, divorce can complicate the process of claiming child-related tax benefits. In most cases, the custodial parent (the parent with whom the child lives the majority of the time) is the one eligible to claim the child tax credit. However, this is not always the case.
If you and your ex-spouse have joint custody or a shared parenting arrangement, you may need to determine who will claim the child tax credit each year. This can be addressed in your divorce settlement agreement. Sometimes, parents alternate years for claiming the child, while in other cases, the parent with the higher income may take the credit to maximize the tax benefit.
It’s critical to ensure that you and your ex-spouse do not both try to claim the same child for tax credits, as this can lead to tax penalties and delays. This is another area where a professional tax advisor can offer valuable guidance to avoid mistakes.
3. Alimony/Spousal Support
Alimony and spousal support are often part of divorce settlements, and it’s important to understand how they are taxed. The tax treatment of alimony depends on when your divorce was finalized.
-- For Divorces Finalized Before 2019: Alimony payments are deductible for the paying spouse and taxable for the receiving spouse.
-- For Divorces Finalized After 2018: The Tax Cuts and Jobs Act (TCJA) changed the treatment of alimony. Alimony is no longer deductible for the paying spouse, nor is it taxable for the receiving spouse.
This change can affect both parties’ tax bills, and if you’re still working through a divorce, it’s essential to understand how these rules will impact your finances and settlement negotiations.
How to Prepare for Your First Post-Divorce Tax Season
The first tax season after a divorce can feel like a maze of forms, deadlines, and decisions. Here are a few steps to help you prepare for what lies ahead:
1. Review Your Divorce Agreement
Before you do anything, take the time to carefully review your divorce decree. Look for any clauses that mention taxes, such as which parent claims the children or how alimony/spousal support is handled. If you’re unsure about any part of your agreement, it’s wise to consult a tax professional who can clarify your obligations and opportunities.
2. Adjust Your Withholdings
If your filing status has changed, you may need to adjust your withholding allowances with your employer. For example, if you’re now filing as “Single” instead of “Married,” your tax withholding will likely change. Be sure to fill out a new W-4 form to reflect your new filing status and avoid surprises when you file your taxes.
3. Consider Working with a Tax Professional
Divorce often introduces complex financial scenarios, and tax considerations are no exception. While it’s possible to do your taxes on your own, a tax professional can help you navigate the nuances of your new tax situation and ensure that you’re not missing out on credits or deductions. They can also help you avoid common pitfalls, such as mistakenly claiming a child or misreporting alimony payments.
4. Keep Records
Whether you’re claiming a child tax credit or receiving alimony, it’s essential to keep detailed records. Maintain copies of all relevant financial documents, such as your divorce agreement, alimony payments, child support payments, and any correspondence with the IRS. These records will help ensure that your tax return is accurate and provide evidence if the IRS has any questions.
Real-Life Examples of Avoiding Tax Pitfalls with Expert Guidance
Many divorcees end up facing unexpected tax burdens because they didn’t fully understand the implications of their new tax situation. Here are two real-life examples of how working with a tax expert helped divorcees avoid costly mistakes:
-- Example 1: The Child Tax Credit Confusion
Jennifer and Mark had joint custody of their two children and were unsure which parent should claim the child tax credit. They both filed their returns separately and both attempted to claim the same children, resulting in a notice from the IRS. By working with a tax professional, they were able to establish a clear agreement on who would claim the children in which years, preventing penalties and making their tax filing smoother.
-- Example 2: Misreporting Alimony
After a divorce finalized in 2020, Thomas mistakenly believed he could deduct his alimony payments from his taxes, as he had done in previous years. He filed his taxes without considering the changes in the tax code and ended up paying more than he needed to. After consulting a tax professional, Thomas was able to amend his tax return and avoid further penalties.
Divorce comes with many challenges, and tax considerations are an often-overlooked part of the process. By understanding how your tax status changes, preparing for your first post-divorce tax season, and seeking expert guidance, you can navigate this complex terrain with confidence. A tax professional can help you avoid costly mistakes and ensure that you’re making the most of available credits and deductions. With the right support, you can move forward with peace of mind, knowing that your taxes are in order as you build your new financial future.
The concepts illustrated here have legal, accounting and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or accounting advice. Please consult with the appropriate professional for advice concerning your individual circumstances. For more information about Janney, please see Janney's Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
