Divorce is difficult, no matter the cause.
Whether you were married three months or ten years, whether you have a lot of shared property or very little, and whether or not you have children. Separating from a spouse is an emotionally challenging, financially complex, and often messy process that is hard on everyone involved.
What many people don’t expect is that the confusion that stems from divorce can bleed into the next year in ways you might not even realize.
Yes, we’re talking about taxes.
As a professional tax preparation company that’s been in business for nearly two decades, we’ve seen just about every tax situation you can imagine. And unfortunately, that includes more than our fair share of tax returns following divorce proceedings. Many of our clients are surprised at just how many unique tax changes divorce can bring.
If you’re going through it now, we know it’s hard—so we’re here to make understanding those tax adjustments a bit easier.
From child support to filing status, a lot of tax changes occur following a divorce. We’re going to walk you through the five most common (and most surprising), but we’re always happy to explain if you get in touch.
It’s no surprise that your filing status changes following a divorce. In fact, that’s probably the one change in tax situation just about everyone can guess. However, a lot of people have no idea when that new marriage status kicks in—and getting it wrong can adversely impact what you owe in taxes.
Your filing status depends on your marriage status at the start of the New Year.
If your divorce isn’t finalized by the end of the tax year, you still need to file as married. Although it can be tempting to file as single—it’s emotionally satisfying and you may be eager to move on—remember, you’re filing your taxes for the previous year. So to be accurate, you need to file your marriage status accordingly.
Following a divorce, there are various types of family support the courts may have determined one party may pay to another. It’s worth understanding how payments like child support and alimony are taxed—from both sides.
If you’re paying child support, your payments are not tax deductible.
If you’re receiving child support, your payments are not reported as income.
If you’re paying alimony, your payments are not tax deductible. (This is a change from previous law, which stated your payments were only tax deductible if your divorce was finalized by the end of the tax year. If your divorce was finalized prior to 2019, you’ll still follow this rule!)
If you’re receiving alimony, your payments are not reported as income. (This is a change from previous law, which stated that you needed to report your payments if your divorce was finalized by the end of the tax year. If your divorce was finalized prior to 2019, you’ll still follow this rule!
If you’ve rolled various payments into “Family Support,” you’ll generally follow a similar rule to alimony payments.
In contentious divorces, it can be very emotionally tempting to claim your children as dependents—regardless of who has custody. Fight this urge and review your divorce decree, which will generally spell out who will be claiming dependents.
If the decree doesn’t settle the issue, typically the parent with custody will claim any children as dependents. For joint custody, whichever parent has a greater share of days in a year will claim a child or children as dependents. And yes, this can change down the line as custody evolves over time.
If you do have a dependent and provide over half their support, be sure to file as “Head of Household” rather than “Single.” As long as you were single by the last day of the tax year, the difference is substantial: The standard deduction for single filers is $12,000, while the standard deduction for Head of Household is $18,000.
If you do have a child you can claim as a dependent, then as a newly single parent, you have access to new credits you may not have had when you were filing jointly.
For example, as a newly single parent, you may find it necessary to pay for childcare during your regular work hours. As the custodial parent of one or more children under the age of 13, you have access to the Child and Dependent Care Credit. This credit can alleviate some of the burden of childcare costs by offering a credit of up to $1,050 for one child and $2,100 for two or more children.
As you should aim to do whenever you experience a big life change, be sure to adjust your withholding on your W-4 with your employer to reflect your new filing status.
We understand it can be a difficult adjustment to make, especially if you’ve been attempting to compartmentalize your divorce from your work life. However, your W-4 is private, and the benefits for updating your withholding far outweigh the perceived drawbacks.
The sooner you make the changes, the sooner it’s out of the way—and the sooner your paychecks will begin reflecting the new filing status. In fact, not adjusting your withholding can leave you open for an unexpected tax bill or leave money on the table until you get your tax refund.
As with any major life change, divorce is challenging in countless ways—not the least of which is the financial changes it brings.
At Edge Financial, we don’t think taxes need to be an extra stressor on top of everything else. Remembering the key tax changes that follow a divorce can help you handle your first tax return in this new chapter of your life with ease. And we’re always here to help.
A new chapter always comes with a new outlook and new challenges, but we believe it can be your greatest chapter yet.