I’m Divorced: How Do I File My Taxes?

Filing your taxes should not be hard after you divorce.

Going through a divorce can be emotionally draining and a financial burden. The good news is that filing your taxes doesn’t have to be. Preparing your tax return is the very last thought on your mind right now. We’re here to help! You can prepare your tax return online with Priortax.

 

Filing Status

According to the IRS, you are considered married for tax purposes if you are still legally married on December 31st of that year. If your divorce is not finalized by the last day of the year, then you have the following options available to you:

• File as married with a joint tax return
• File as married with separate tax returns

If your divorce was finalized by December 31st of that year, then you are considered divorced for tax purposes. You have the following options available to you:

• File as single
• File as head of household**

**Please note that in order to file as head of household, you must meet all of the IRS requirements.

 

Alimony & Child Support

If you are paying alimony, you can claim a tax deduction on your tax return. This is allowed by the IRS even if you do not itemize your tax deductions. You will need to know your ex-spouse’s social security number. It will be reported on your tax return in order to claim the deduction. The spouse receiving alimony must pay tax on the payments.

It is important to keep in mind that in order for alimony to be taxable and deductible, it must be paid in cash to said spouse.

Unlike alimony payments, child support is not deductible or taxable. The spouse who is paying cannot claim it on their tax return as a tax deduction.

 

Medical Expenses

If you are paying medical expenses for your child, you can continue to claim these as a deduction  on your tax return, regardless of whether you are the custodial parent or not.

 

Claiming Dependents as the ‘Custodial Parent’

A dependent can only be claimed on the custodial parent’s tax return. As of 2009, the IRS defines a ‘custodial parent’ as the parent with whom the child resides for the greatest number of nights per year. If you and your ex-spouse split the number of nights per year evenly that your child resides with each, then the ‘custodial parent’ is the parent with the highest adjusted gross income.

ONLY the custodial parent can claim the following benefits:

• claiming the Head of Household filing status
• claiming the Earned Income Credit
• tax-free dependent care benefits
• claiming the dependent care expense deduction

 

Alternating the Dependency Deduction Annually

Some parents will agree to alternate the dependency deduction; each parent claiming the dependent(s) on their tax return every other year. This will typically occur if both parents spend an equal amount of time with their dependents throughout the year and/or both parents earn approximately the same income amount.

This is accepted by the IRS as long as the custodial parent for that tax year signs and submits Form-8332 with their tax return.

 

Transfer of Assets

Transfer of assets from one spouse to the other is common from a divorce settlement. The most common example of this would be transferring the ownership of property. At the time of transfer, the spouse receiving the property is not liable to pay tax on it. That being said, if the recipient spouse decides to later sell the property that was transferred, he/she would THEN be responsible for paying tax on it. It can be a tricky situation but the tax basis of a property transfer needs to be taken into consideration before finalizing a divorce.

 

Sale of Home

Divorce is one of the few instances where renting a home (over owning) is probably most appealing for the parties involved. If you and your spouse owned a home throughout your marriage, then deciding to sell the property is common.

There is a tax law that allows both spouses to exclude tax on the first $250,000 of gain on their individual tax returns if the following tests are met:

• you have owned the home for 5 years, AND
• you have lived in the home as your primary place of residence for the past 2 years of ownership (at least)

If you decide to sell before the divorce is final and file a joint tax return as a married couple, then you can exclude up to $500,000. This is still contingent on the two tests above being met.

 

Transfer of Retirement Assets

Left with the not-so-appealing option of dipping into your 401K to provide money to your ex-spouse? Tread with caution because the IRS considers this a taxable distribution…meaning you pay tax on the distribution.

There is a way around paying the tax on this distribution. You would need to transfer the funds under a Qualified Domestic Relations Order. The tax liability will be excused and your ex-spouse will still be able to receive funds.

 

Divorced and (STILL) confused?

Although a number of different scenarios were touched on, don’t be overwhelmed. Each of these situations does not apply to everyone involved in a divorce. If you still feel confused about your specific situation, reach out to our customer service team who is ready to answer all of your tax questions via telephone, email and even live-chat! Remember that this is just a new chapter…start off on the right foot.

This entry was posted on Wednesday, October 21st, 2015 at 7:23 pm and is filed under Tax and Life Changes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.