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Filing Taxes After Divorce – Tax Implications & Claiming Children

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Divorce is hard. It can be stressful emotionally, mentally, physically and financially. When you add tax issues — already a confusing subject —  divorce doesn’t get any easier.

Following a complicated divorce, taxes sometimes become even more complex than they were when you filed as a couple. Here are some of the issues you need to consider when filing your taxes after a divorce.

Your Filing Status After Divorce

The rules for determining your filing status are fairly straightforward; the status of your marriage on the last day of the year determines your filing status.

If you’re divorced or legally separated under state law any time before December 31st, you can file as single or head of household for the entire year. If your divorce or legal separation isn’t finalized by the last day of the calendar year, the IRS considers you to be married. Married taxpayers can file jointly or separately from their spouses, but they cannot file as single.

There is an exception for legally married people who live apart. The IRS may consider you to be unmarried if all of the following apply:

  • You lived apart from your spouse for the last six months of the tax year.
  • You file a separate return from your spouse.
  • You paid over half the cost of keeping up your home during the tax year.
  • Your home was the main home of your child, stepchild, or foster child for more than half of the tax year.
  • You can claim this child as your dependent, or you could claim the child except that the child’s other parent can claim them under the rule for children of divorced or separated parents.

If all of the following apply, you can opt to file as head of household. You should also check the laws in your state to determine if you’re considered legally separated, which would make you unmarried in the eyes of the IRS.

Non-Consensual Joint Filing

If your spouse wants to file a joint return, but you want to file as married filing separately, your best course of action is to file your own return with a married filing separately filing status as soon as possible.

Technically, your spouse cannot file a joint tax return without your consent. However, it’s possible for your spouse to forge your signature on a return, whether it’s filed on paper or electronically. This is where things get tricky. If you have a history of filing jointly with your spouse and make no attempt to file a return on your own, the IRS can decide that your consent to file a joint return was implied. They will accept your spouse’s return as valid, and you will be responsible for any tax due.

If you discover your spouse filed a joint return without your consent, speak to your tax professional or attorney. They can help you object to the joint filing, and your spouse may face hefty penalties and even jail time.

Filing Status & Selling Your Home

If you were still legally married when you sold your home, the married filing jointly filing status allows you to exclude up to $500,000 of profit from the sale of the property from your taxable income. To qualify for the exclusion, you must have used the home as your primary residence for at least two out of the five years before selling it.

If you were legally divorced when the sale went through, you and your ex can each exclude $250,000 of gain. Any profit beyond the maximum exclusion is taxable income, subject to long-term capital gains tax rates, assuming you owned the home for longer than one year.

Child Support & Alimony

If you have children and are obligated to pay child support, it’s important to know that child support is “tax neutral.” In other words, paying child support does not generate a tax deduction, and receiving child support does not increase your taxable income.

Alimony is another story — for some people. Before the Tax Cuts and Jobs Act of 2017 (TCJA), alimony payers could deduct the payments, and alimony recipients had to report the payments as taxable income. This treatment continues for alimony payments made under divorce agreements executed on or before December 31, 2018. For these taxpayers, even if child support and alimony payments were covered in one monthly payment, the IRS considers the alimony portion to be taxable income.

For divorces after December 31, 2018, the new law eliminates the deduction for alimony payments, and alimony recipients no longer have to include the payments in their taxable income.

Tax Benefits for Custodial Parents

After a divorce, the parent with whom the children live most of the time is the custodial parent and usually ends up with most of the expenses. However, the custodial parent qualifies for a few tax breaks, which can help lower taxable income, even before the divorce process is complete.

1. Head of Household Filing Status

You don’t have to automatically go back to filing as single after a divorce. If you can claim a qualifying dependent and meet the requirements, you may be able to reduce your tax bill significantly by filing as head of household. Your standard deduction will be higher, and more of your income will fall into lower income tax brackets.

2. Earned Income Tax Credit

If you were the lower-earning spouse and are now taking care of the children, you may be eligible for the Earned Income Tax Credit (EITC). For higher-income households, the credit isn’t as generous or may not even be available. However, if you qualify to take this credit, it can significantly reduce your tax liability.

To claim the EITC for 2018, your earned income and adjusted gross income (AGI) much each be less than:

Filing Status

No. of Qualifying Children Claimed

 

Zero

OneTwo

Three or More

Single, Head of Household, or Widowed

$15,270

$40,320$45,802

$49,194

Married Filing Jointly

$20,950

$46,010$51,492

$54,884

For 2018, the maximum credit amounts are:

  • $6,431 for three or more qualifying children
  • $5,716 for two qualifying children
  • $3,461 for one qualifying child
  • $519 for no qualifying children

Again, since child support is not considered earned income, it won’t affect your eligibility for the EITC.

3. Child & Dependent Care Tax Credit

If you’re the custodial parent and you pay for any day care, babysitting, after-school care, nannies, or other care, you may be eligible for the Child and Dependent Care Credit.

You can claim a percentage of your expenses, depending on your income, and your total credit can be worth up to $3,000 for one child or up to $6,000 for two or more children. This tax credit directly reduces your tax bill, so it can be quite valuable.

4. Children’s Dependency Exemption & Child Tax Credit

Historically, the custodial parent benefitted from claiming the dependency exemption for any children; it was worth $4,050 per child for the 2017 tax year. However, the TCJA eliminated personal and dependent exemptions for the 2018 to 2025 tax years.

That said, there is another tax break parents can take advantage of for dependent children: the Child Tax Credit, which is tied to the dependents named on your tax return. For the 2018 to 2025 tax years, the maximum Child Tax Credit is $2,000 per child under the age of 17. If the credit brings your tax liability to zero, up to $1,400 of the credit is refundable, meaning you can collect that amount even if you don’t owe any federal income tax.

The custodial parent can agree to transfer the right to claim the child as a dependent to the non-custodial parent using Form 8332. If you wish to transfer dependency, you can either set this out in the divorce agreement or handle it on a year-by-year basis by completing the form for any years the custodial parent won’t claim the child as a dependent.

Legal Fees

Divorce is an expensive legal process. Legal fees paid for negotiating child support, custody arrangements, and other aspects of a divorce settlement that don’t pertain to taxable income are not deductible. Prior to the TCJA, the IRS gave divorced couples a break for legal bills paid to secure taxable income, such as alimony. It also allowed couples to deduct legal fees for tax advice.

For example, if your lawyer paid a consultation fee to a tax attorney to determine how the divorce would impact your taxes, that consultation fee would be deductible. That portion of your legal fees would have been allowable as a miscellaneous itemized deduction on Schedule A, and you would have only benefitted if your total miscellaneous itemized deductions exceeded 2% of your AGI.

Unfortunately, such fees are no longer deductible under the TCJA. The TCJA eliminated all miscellaneous itemized deductions subject to a 2% floor for the 2018 to 2025 tax years.

Final Word

Taxes may be the last thing on your mind while going through a divorce. Unless your attorney brings up tax topics, you might not get around to dealing with your new tax situation until it’s too late to research the smartest moves and negotiate a better tax position for yourself.

But rather than cave in to the complexities of divorce proceedings and end up owing a lot more after a tough year, be proactive and look ahead. Take the time to work with your accountant — and even your ex-spouse — and come up with an honest and effective way to maximize deductions and minimize your liability.

Have you gone through a divorce? What were the biggest tax issues you ran into?

Janet Berry-Johnson
Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter.

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