Going through a divorce is undoubtedly a challenging time, and it’s essential to be aware of all the associated responsibilities, including filing taxes after the split. Not only do you need to adjust the amount withheld from your paycheck by filing a new W-4 form with your employer, but there are also several tax breaks that often go unnoticed. Let’s explore some of these overlooked opportunities to potentially save money and simplify your tax situation.
Tax Filing Status and Timing
Your marital status as of December 31 determines your tax filing status for that year. If you and your spouse separated but weren’t officially divorced by the end of the year, you still have the option to file a joint return, which can often result in tax savings. Alternatively, you can choose the married-filing-separately status for the tax return you file for the year of separation.
Once the divorce is finalized, you can file as head of household if you meet certain criteria. This filing status provides a larger standard deduction and more favorable tax brackets. To qualify as head of household, you must have lived apart from your spouse for at least six months of the year, file separate returns, have a dependent living with you for over half of the year, and pay more than half of the household expenses.
Alimony Deductions
If your divorce agreement was in place before December 31, 2018, you can generally deduct alimony payments made to a former spouse. However, if the divorce or separation agreement was signed after that date, the alimony payments are not deductible. The receiving spouse, in turn, must include alimony or separation payments as taxable income.
To ensure the deductibility of alimony, it must be clearly specified in your divorce agreement as cash-only payments. Reporting your ex-spouse’s Social Security number is also required to facilitate the IRS’s verification of the alimony as taxable income.
Child-Related Tax Benefits
For divorced couples, determining who can claim child-related tax benefits can be crucial. Generally, only the custodial parent, the one with whom the children live for the majority of the year, can claim the child tax credit or credit for other dependents.
The child tax credit provides a $2,000 credit per child aged 16 or younger. If a child is ineligible for the child tax credit due to age, they may qualify for the credit for other dependents, which can provide up to $500 per qualifying dependent.
However, it is possible for the noncustodial parent to claim these credits if the custodial parent signs a waiver relinquishing the exemption for that child. This strategy can be advantageous if the noncustodial parent is in a higher tax bracket.
Child Medical Expenses
If you continue to pay a child’s medical bills after the divorce, you can include those costs in your medical expense deductions, even if your former spouse has custody of the child. Medical expenses are deductible to the extent they exceed 7.5% of your adjusted gross income. Covering the child’s medical bills could help you surpass this threshold and claim the deduction.
Asset Transfers and Capital Gains
During the divorce settlement, when property transfers from one spouse to another, the recipient doesn’t pay tax on the transfer. However, it’s important to note that the tax basis of the property also shifts. Consequently, if you sell the property received from your former spouse in the divorce, you will be subject to capital gains tax on both the appreciation before and after the transfer. To make informed decisions during the property division process, consider not only the value but also the tax basis of the assets.
Timing is crucial when it comes to selling your home after a divorce. If you and your ex-spouse meet the two-year ownership and use tests, you can each exclude up to $250,000 of gain from the sale of your individual returns. Even if the two-year tests aren’t met, a reduced exclusion may still apply based on the portion of the two-year period the home was owned and used.
IRA Contributions
Normally, to contribute to an IRA, a taxpayer must have earned income from a job or self-employment. However, there’s an exception for some divorced individuals. Taxable alimony received counts as compensation for making IRA contributions. In 2023, you can contribute up to $6,500 to a traditional IRA or a Roth IRA, or a combination of the two. If you’re 50 years old or older, you can contribute an additional $1,000.
In summary, while navigating the complexities of divorce, it’s crucial not to overlook the potential tax breaks available to you. By understanding these opportunities, you can make informed decisions, optimize your tax situation, and potentially ease the financial burden associated with a divorce. Remember, consulting a qualified Fee-Only attorney and or tax professional is always recommended to ensure you make the most of the available tax benefits tailored to your specific circumstances.
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