Going through a divorce and dealing with all the personal changes it brings is never easy. Unfortunately, you’ll also need to file your income tax returns differently. Once you’re divorced, some of the tax issues you’ll face are changes to your filing status, whether or not you can claim your children as dependents and how to report new types of income you receive.
Filing Status Changes
When you’re legally married on the last day of the tax year, your filing status options are either married filing jointly or married filing separately. Once your divorce is final, even if it occurs on December 31, you must then file as single or head of household. You can always file as single, but if eligible to file as head of household, you can report a larger standard deduction and take advantage of lower tax rates. To file as head of household, you must pay more than half the cost of maintaining your home and have a dependent live with you for more than half the tax year.
Who Claims Dependents
Divorces become more complicated when child custody issues must be resolved. Only one parent may take a dependent exemption for each child and the IRS generally allows the parent with custody to report the exemption. If you aren’t awarded custody, you may still be able to take exemptions for your children. For divorces finalized after 2008, you may only do so by having your former spouse sign Form 8832, which waives their right to claim the dependent exemptions, and attaching it to your return. If your divorce was finalized before 2009, you also have the option of attaching pages from your divorce decree that state you’re entitled to the exemption despite not having custody or sharing joint custody.
Alimony & Child Support
If you obtain an award of alimony in your divorce decree, you’ll need to report it as income on your tax returns. However, if you’re the former spouse who pays the alimony, you may take a full deduction for it as an adjustment to income. In order to take the deduction, the IRS requires you to include your former spouse’s Social Security number on the deduction line. Payments you receive or pay for child support, however, don’t affect your tax return – it’s neither deductible nor taxable.
Marital Property Transfers
Among the many decisions you and your former spouse, or a court judge, need to make is how to split marital property, which can include retirement accounts, homes, cars, investments and essentially everything your state doesn’t exclude. The IRS is very clear that the transfer of property between spouses will not have any tax consequences. However, if your divorce decree orders your former husband to distribute funds from an IRA or other tax-deferred retirement account, for example, you may need to pay tax on the distribution you receive if the specific tax rules that govern the retirement account render you ineligible to make a tax-free rollover of the distribution into a different qualified retirement account. Tax deferred retirement accounts present unique tax issues, but for a majority of the other property you receive, nothing gets reported on your return.