Five Tax Issues to Understand After Divorce

Navigating the difficult road through a #divorce can be a challenge. One area that is especially difficult is understanding your finances and how to manage them after the divorce is final. And within the realm of understanding your finances, one particular area presents special challenges for many divorced spouses – taxes.

There are five key things to understand about taxes after divorce.

Filing Status – Your federal filing status is determined by your marital status as of December 31st of the preceding year, so while your divorce is pending your status will be married filing jointly or married filing separately. However, once your divorce is finalized, your status will be one of two options: single or head of household. Which one you can use depends on whether you meet the requirements for providing maintenance of a home for your child. See IRS publications for more information.

Children as Dependents – Who gets to claim the children as dependents for tax purposes should have been spelled out in your divorce agreement. If it was not, then the custodial parent gets the exemption. The IRS does track dependency exemptions, so if you and your ex both claim the child, it will likely cause issues later on when the duplicate deduction is discovered.

Home Ownership Deductions – If you kept the marital home (and refinanced it in your name only), then any ownership-related deductions are yours. However, if you live in the home but both you and your ex still hold the mortgage, who gets the deductions gets more difficult. This is something that should have been negotiated and agreed to in your final divorce settlement agreement.

Earned Income & Alimony – Be sure to re-evaluate your W-4 withholdings after the divorce, to ensure they match your desired tax strategies. If your income has significantly decreased, you may want to have less withheld on each paycheck. Also, if you are going to receive alimony, be sure and address estimated tax payments throughout the year. Talk to your CPA about the details of estimated tax payments, and whether they apply to you.

Splitting Retirement Accounts – If you are going to receive a portion of your ex’s retirement accounts, be sure to use a Qualified Domestic Relations Order to avoid unintended tax consequences. Likewise, if a taxable account is being divided, be sure to account for the tax implications during the calculations.

Going through a divorce can lead to financial uncertainty and concern. Visit our website to learn how a Divorce Transitional Support Advisor can help you or your client regain financial stability after a divorce.