It’s that time of year when everyone is rushing to file their taxes. Keeping everything in order and making sure you file everything correctly is challenging under normal circumstances, but the process is even trickier if you are newly divorced.
Here are some important things to keep to help you handle tax issues now that you are divorced.
Determining filing status
The filing status for most couples is determined on the last day of the year.
If you were still married on December 31, then you can file as “married, filing jointly” and still be entitled to advantages like exclusion limits for capital gain on the sale of a principle residence.
You can still file this way even if you are living separately and your divorce started before the end of the year.
It is important to keep in mind that since you will be filing jointly, you will both be liable if you are audited.
Who claims the kids?
Unless it is otherwise stated in the divorce decree or settlement, the custodial parent has the right to claim the kids as dependents.
If the parents share custody, then the parent that pays child support can claim the tax dependency exemption. If there is no child support order, then the parent with the higher adjusted gross income can claim them.
Often, parents will alternate each year who gets to claim the children.
It is also possible for the parties to agree to other arrangements, but the court is able to order terms it concludes are in the children’s best interest.
Deducting child support
Although child support is not deductible, other expenses such as childcare costs, health expenses, and school expenses sometimes are.
It’s also not possible to claim child support as income.
One of the benefits of paying alimony is that it is deductible.
Joe Cordell says there are four circumstances under which you can deduct alimony:
- The payments are made pursuant to a written agreement or judgment;
- You are not members of the same household, provided that
- The payments are not child support, which is determined partially by a three-year payment analysis; and
- They cease upon your ex’s death.
If you do deduct alimony, however, make sure you understand the alimony recapture rule to avoid a future audit. If your alimony is modified or terminated during the first three years after your divorce, this trap can force you to report those previously deducted payments as income.
Deducting attorney fees
You cannot deduct attorney fees. However, any fees incurred related to tax advice regarding your divorce can be deducted up to federal government limits.
Even if you received the advice from your divorce attorney rather than a tax specialist, you might still be able to deduct the fees if they advised you about your taxes. You need to make sure the fees are noted on your bill and clearly state that the advice was for tax purposes.
What about my 401(k)?
If you had to withdraw funds from your 401(k) account to give to your ex then you will face an early withdrawal penalty that is considered taxable income.
However, you can dodge this by utilizing a Qualified Domestic Relations Order.
Taxing profits from the sale of the marital home
The sale of the marital home creates some additional tax complications. Single filers can avoid taxes on up to $250,000 of the profits from the home so long as you’ve lived there in at least two of the last five years. (That number is $500,000 for married couples.)
The spouse given ownership of the home can also claim mortgage interest deductions. If you own the home jointly, then you will split the mortgage interest deduction.