Divorce brings change, some expected and some surprising. From setting up a single residence to determining how past assets are split, these changes can be difficult and time consuming. While attempting to manage the changes tied to divorce, be sure to keep the following tax implications in mind.
Filing Status – Married v. Single
If the divorce decree is not received by year’s end, the correct filing status is married. This is true even when separated the entire year. Within this status, there are two options: married filing jointly or married filing separately. Each has tax rate and liability differences. Although those filing as married filing jointly may have a lower combined tax, both are liable for any taxes due.
However, if the final decree of divorce is obtained before the end of the year the filing status should be listed as single. As a result, a former spouse’s deduction cannot be claimed even if the divorce decree is obtained at the end of the year and full support was provided to the former spouse.
Although the losses cannot be recouped, there is potential to file as Head of Household. If more than half the cost of keeping up a home and an unmarried status can be claimed the last day of the year, you may qualify. This status allows a higher standard deduction and lower tax rate along with the potential to claim certain credits.
Credits and Deductions
When filing requirements for Head of Household status are fulfilled, both the dependent care credit and the earned income credit may also apply. Additionally, if children can be claimed as dependents, you may qualify for the American Opportunity Tax Credit or Lifetime Learning Credits.
The IRS also allows a number of deductions including alimony and certain individual retirement contributions.
Property transfers between spouses are generally tax free. If the property is sold, a portion of capital gains can remain tax free. However, if the limit is exceeded, taxes are due. It is important to be aware that some assets carry automatic tax liabilities and that property considerations extend far beyond a family home in the eyes of the IRS. Assets such as retirement plans and health savings accounts are also reviewed in this group.
Determining the tax implications of a divorce can be difficult, to ensure your legal rights are protected contact an experienced divorce lawyer.