Right now, all across the U.S., people are engaged in that annual ritual we all love to hate: filing state and federal income taxes. If you’re a newly divorced woman, or a woman who’s currently immersed in the divorce process, tax season can seem particularly trying. Do you have a new filing status? Is alimony taxable income? How do you account for child support payments? The questions can seem overwhelming.
No one enjoys filing taxes; but rest assured, once the job is done, you’ll breathe a huge sigh of relief knowing you’ve accomplished a critical financial task as an independent woman. Here are my top ten tips to help you through the process:
Your Tax Filing Status
Your federal income tax filing status is set by your marital status on the last day of the tax year.
If you were still married on December 31, 2012, then for federal income tax purposes you are considered married for the entire year of 2012. Likewise, if you were divorced as of December 31, 2012, then the IRS considers you divorced for the entire year.
But, what if your status was “legally separated” on December 31? Well, it’s a bit more complicated.
In very general terms, the IRS usually follows state law for determining marital status. That means whether or not your legal separation leaves you considered married or unmarried depends upon complicated laws at both the state and federal level.
For example, according to tax law, an individual legally separated from his/her spouse under a decree of divorce or a decree of separate maintenance shall not be considered as married. But, not every state allows for a decree of separate maintenance, and if the state where you live doesn’t, you are still considered married until your divorce is final.
It’s best to ask your attorney/tax advisor whether your current legal status meets the definition of a decree of separate maintenance.
Filing Jointly or Separately If Married
If your tax filing status is married, the IRS always allows you to file either jointly or separately. Make that decision carefully. There are pros and cons to each choice.
Typically, “married, filing jointly” is the most advantageous filing status because it usually affords the most benefits and deductions. But, there can be advantages to filing separately. For example, you cannot be held responsible for your husband’s unpaid taxes.
Even if you choose to file separately this year, you will still be responsible for tax returns from prior years when you and your husband filed jointly.
If your tax filing status is divorced, decide if you want to file as single or head of household
Single or Head of Household
If your tax filing status is divorced, you must file as single or head of household.
Filing as head of household will typically result in a lower tax bill than filing as single, but the head of household designation has strict requirements. To qualify as head of household you must:
- maintain a household for your child (even if you do not claim them as a dependent)
- be unmarried at the end of the year or living apart from your spouse for more than six months
- provide more than half the cost of maintaining the household
- be a U.S. citizen or resident alien for the entire tax year
In addition, the household must be your home and generally must also be the main home of the qualifying dependent (i.e., where they live for more than half the year).
People sometimes mistakenly believe that claiming a child as a dependent entitles them to file as head of household. This is not necessarily true. Even if you allow your ex-spouse to claim your child as a dependent, you can still file as head of household, provided you meet the requirements above.
Exemption For Children
The custodial parent is entitled to the exemption for children, although in some cases, this can be traded to the non-custodial parent using IRS Form 8332.
The value of the exemption for children varies significantly depending on income, so talk to your accountant and divorce financial planner.
Also, child-care credits are different than the exemption for children. Child-care credits cannot be traded; only the custodial parent can take them.
Child Support Payments
Child support does not affect your taxes in any way. It is always tax-neutral. Child support payments are not taxable income for the parent receiving the support and they are not tax-deductible for the parent paying the support.
Alimony payments are almost always taxable income for the recipient, and they are almost always tax deductible for the payor.
The IRS is very strict regarding what qualifies for the alimony deduction. For example, if you and your husband continue to share a residence after the divorce, any alimony payments made during that time cannot be deducted. Also, the alimony payments deducted must be as outlined in a written separation or divorce agreement. (See Seven Key Things Women Need to Know About the Tax Implications of Alimony Payments
In some cases, spouses might agree that alimony will not be considered taxable income to the recipient and tax-deductible to the payor. If that language is included in the final divorce decree, then that income will not have to be declared by the recipient and payments are non-deductible for the payor.
When assets are transferred as part of a divorce settlement agreement, the beneficiary doesn’t have to pay taxes on the transfer.
Initially, that may sound like a great deal but if you decide to sell that property later, you will have to pay capital gains tax on all the appreciation before, as well as after, the transfer. If that asset is a big-ticket item, like your house, the capital gains can be quite significant. Capital gains tax is just one implication you need to consider when deciding whether or not to keep your house after divorce.
You cannot deduct the cost of your divorce attorney and other expenses directly related to your divorce. However, you may be able to deduct certain fees and expenses for professionals who help you prepare your taxes. This tax advantage makes hiring professional help more palatable especially if they able to save you thousands of dollars in the taxes.
Signing a joint tax return while you’re divorcing can be risky. Protect yourself by asking your attorney and tax advisor to review the returns before you file, and also, if at all possible, obtain an indemnification agreement. This indemnification agreement would mean that neither spouse is held responsible for the other’s tax liability.
Sign Your Own Tax Return
This may sound like a “no brainer,” but many wives relinquish certain financial responsibilities, like signing tax returns, to their husbands –even when the marriage is solid. If you’re in the process of divorcing, filing a tax return may be the last thing on earth you want to think about, and “letting him take care of it” may seem like an easy solution. Please don’t put your financial future at risk. Make certain you’re the one signing the tax return –and make sure you understand it before you do. If you’re filing jointly, get an indemnification agreement.
My best advice is to Think Financially, Not Emotionally®–not only during tax season, but throughout the entire divorce process. Navigating the tax implications of divorce settlement options is enormously complex and one of the many areas where an experienced divorce financial expert can make a significant difference in the final outcome of your divorce and your future financial security.
Jeff Landers is a Certified Divorce Financial Analyst™ and is the founder of Bedrock Divorce Advisors.
Jeff is also the author of the new book, Divorce: Think Financially, Not Emotionally – What Women Need To Know About Securing Their Financial Future Before, During, And After Divorce, which provides women going through the crisis of divorce with the tools they need to secure their financial future. He is donating 50% of all profits to the Bedrock Divorce Fund for Abused Women, Inc., a 501(c)(3) nonprofit charity whose mission is to help abused women successfully and permanently leave their abusers.
This article is for informational purposes only, and does not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.
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