When it comes to divorce, there’s a host of legalities to worry about, but one facet that doesn’t always immediately come to mind is the effect filing for divorce can have on your taxes. From exemption options to switching your filing status, there’s plenty to prepare for when you’re prepping taxes during a divorce. Keep these aspects in mind and help yourself alleviate the extra stress.
So You’ve Never Prepared Your Taxes
Perhaps your former spouse was always the preparer of your taxes, leaving you grasping at straws about how to approach the filing process on your own. This is common, but need not be a cause for concern. It’s a good idea to use professional help at least the first time through, as missing certain exemptions and dealing with the complications of divorce can cause errors in filing that can cost you hundreds to thousands of dollars. Use a company like Community Tax to file the first time around; a certified tax professional can walk you through the process and the small fee you pay for help is more than worth the peace of mind, especially when going through the tumultuous time of divorce proceedings.
The Issue of Filing Status
Couples that have not yet divorced at the end of the year can still file a joint return if they wish to, but the alternative is filing as married filing separately. If you’ve already gotten your divorce by the end of the year, you can’t file jointly. You may choose to file as the head of the household, which generally comes along with larger standard deductions and an easier tax bracket. You may only file for this status if you took care of a dependent, whether it be a child or elderly parent, for more than half of the year, and you paid for a majority of the upkeep and maintenance of your home.
If You Sell Your Home
After a divorce, many couples end up selling a home in favor of a fresh start. If you and your spouse plan on selling your home or you already have, you’ll need to understand the tax implications that come along with this income. If you owned the home and lived there for at least two years out of the previous five, you can avoid taxes on the first $250,000 gained from the sale if filing single; $500,000 if filing jointly.
Filing an Exemption for a Dependent
When it comes to claiming your child as a dependent, you can only continue to do so after your divorce filings are complete if he or she has lived with you for a longer amount of time throughout the year than with your former spouse. This gives you the distinction of custodial parent. However, if you are not the custodial parent, you can still claim the exemption providing your ex-spouse signs a written waiver pledging to leave it unclaimed for you.
When it Comes to Alimony
If you’re paying alimony to your spouse, you’ll have the opportunity to take a tax deduction for these payments, even if you don’t take the time to itemize your deductions. To qualify for a deduction, your alimony payments must be in cash and must be written out in your divorce agreement. If you’re the spouse receiving alimony payments, know that you’ll be required to pay income taxes on the payments you are receiving. You’ll both want to know each other’s SSNs to be able to file without running into issues.
The Retirement Issues
If you’re cashing out a 401(k) plan to provide money to your former spouse, this can be considered a taxable distribution. With this contribution, you’ll be required to pay a tax on the money. If you’d like to transfer this money without being subject to a steep tax, use a Qualified Domestic Relations Order (QRDO). This means your former spouse has access to the funds and ensures you don’t take any of the taxes that would otherwise be owed on this money. Similar to alimony deductions, you’ll need proof of this QDRO spelled out in your divorce agreement.
Divorce is hard, but your finances after divorcing need not be more complicated with tax issues. Keep these tips in mind and use the help of a financial advisor to determine the tax implications of your divorce.