Tax season is coming. (Anyone hear the Jaws theme suddenly start playing in the background?) If you are either in the process of getting divorced or got divorced last year, then you may be facing a totally different tax situation than you are used to. Take care! You don’t want to accidentally lose out on some big new deductions you weren’t aware of or claim your children when your husband also claims them. Here are five important things you need to know before you file your taxes to avoid some major tax pitfalls…and unpleasant correspondence with the IRS.
1. Know Your Tax Filing Status
The very first thing you need to know before you start filing your taxes this year is your filing status. Your tax bracket, available deductions, and overall tax bill will be hugely affected by whether you file jointly with your spouse or file separately. If you and your spouse are officially divorced by December 31st of the prior year then you will have to file separate taxes. (If you are the custodial parent of at least one dependent child, you can file as a head of household and receive a much larger standard deduction and lower tax rates.) However, if you are separated or still in the divorce process at the end of the prior year, then you have the option of either filing a joint tax return or listing your status as “Married Filing Separately.” Your accountant can help you determine which option is best for your situation. (Learn more about tax filing status during divorce.)
2. Who Will Claim the Kids?
Each dependent child you claim on your tax return could be worth up to a $1,000 child credit, up to a $2,500 credit for the American Opportunity higher education credit, and up to $2,000 for the Lifetime Learning higher education tax credit. Not bad, especially if you could use the money to buy school books, soccer uniforms, or to fund college savings accounts. However, only one parent can claim the children. If you are the custodial parent you have the automatic right to claim the children on your tax return unless you waive that right. If you share custody of your children with your ex, then things can get a little trickier. Typically, the parent who spent more time with the children in the prior year has the right to claim them; however, you can also negotiate with your ex-spouse to determine who will claim the children. Either you or your spouse can sign a waiver saying you will not claim the children this year.
3. Are You Paying Alimony/Spousal Support?
If you are paying your husband alimony (also known as spousal support or maintenance), you can deduct those payments from your taxes, so don’t overlook that. (Find out if you will have to pay alimony to your ex-husband.) You cannot, however, deduct child support payments, so don’t try to get away with deducting more than is legal. If you are receiving alimony from your husband, you must report the amount as income on your tax return. This is very important to understand, because it means that if you spend all of your alimony payments, you could be surprised by a tax bill. (Find out if you are eligible for alimony.) You can either put a percentage of each alimony check into a savings account to cover your tax bill or ask your employer to withhold a little more from your paychecks to cover your alimony income. Child support is not considered income and does not have to be reported on your taxes.
4. Be Prepared for Property Taxes If You Kept the Home
If you kept the home, then not only will you have to shoulder the monthly mortgage payments on your own, but you’ll also have to cover the full amount of property taxes as well. However, you will not have to pay taxes on the property transfer. Just be aware that if your home has increased dramatically in value since you and your ex-spouse originally bought it, you may face high capital gains taxes if you decide to sell the home at a later time! (Capital gains taxes will only apply if your home has appreciated in value by more than $250,000 since you originally bought it).
5. Know All Your Deductions
You may be surprised to find out just how many additional deductions you can take as a result of your divorce. For example, if you paid a financial consultant to help you understand your tax situation before you divorced, you can deduct that cost. You can also deduct any medical costs you pay on behalf of your children even if you are not the custodial parent, as well as work-related expenses that result from caring for any children under the age of 13.
After your first year of divorce, it is always a good idea to seek the advice and services of a Certified Public Accountant so that you don’t miss any deductions or make expensive mistakes. If you are still considering divorce and want to learn more about what your financial life might look like after you make the leap, we invite you to sign up for the next Second Saturday Divorce Workshop in your area and to keep reading our divorce article archives.