Tax Tips for the Recently Divorced

Please Note: This year, the deadline for submitting your taxes for the 2017 tax year is Tuesday, April 17th, 2018. 

 

KNOW YOUR FILING STATUS

Your filing status is based on your marital status and your family situation. If you were divorced by midnight on December 31 of the tax year (so, 2017 for your 2018 taxes), you will file separately from your former spouse. You may qualify for the favorable Head of Household status if you are the custodial parent for your child (or children) and you pay more than half the cost of maintaining the home in which your child (or children) live in.

NAME CHANGE & MAILING ADDRESS REQUIREMENTS

A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund. If you were recently divorced and changed back to your previous last name, you’ll need to notify the Social Security Administration (SSA) of this name change. The same goes for your mailing address - Be sure to notify the SSA if this changes.

CHILD SUPPORT VS. ALIMONY

Child support is not deductible to the person who pays it and it is not reported as income for the recipient. Alimony is deductible by the person who pays it and the alimony recipient must report it as income.

Sometimes, a divorced couple decides to roll all financial support together into something called “family support”. If this is the case, the “family support” is fully deductible to the payer and fully taxable as income for the recipient.

CLAIMING CHILDREN AS EXEMPTIONS

Your divorce agreement may specify which former spouse claims the children as exemptions. If it does not, the exemption goes to the custodial parent. If you have joint custody, the exemption goes to the parent who has the child (or children) the greatest number of days during the tax year.

Pro Tip: If you are entitled to claim your chil (or children) as exemptions but your ex-spouse is threatening to claim them anyway, the best thing for you to do is to file early. Then, if your ex does claim them, the IRS will make your ex prove he or she was entitled to the exemption. (If you file after your ex, you will be required to prove you were entitled to the exemption.)

If you have your child (or children) living with you less than six months of the year but are entitled to claim the tax exemption, you will need your ex-spouse to sign IRS Form 8332 (Release of Claim to the Exemption for Child of Divorced or Separated Parents). This form is required to be filed with your income tax return for you to claim the tax exemptions for children not living with you.

THE CHILD CARE CREDIT

If you are the custodial parent and you incur work-related child care for children under the age of 13, don’t forget you may be able to claim a credit for a portion of the cost. Please note that the child care credit is only available to the custodial parent.

ADJUSTING YOUR FORM W-4 WITHHOLDING

The amount you owe in income tax is determined by your Form W-4; your employer deducts taxes based on the number of allowances you claim on this form. If you have been claiming a withholding exemption for your spouse and you divorce, you must give your employer a new Form W-4 within 10 days after the divorce showing the correct number of exemptions.

SETTING UP TAX WITHHOLDING & ESTIMATED TAX PAYMENTS

For every $3600 (approximately) of deductions, you may claim one additional exemption; this includes alimony payments.

If you are employed and are the person receiving alimony payments, consider asking to have extra tax withheld from your paycheck to cover your new tax liability so that you are not surprised on Tax Day. If withholding still doesn’t cover your taxes, set up quarterly estimated tax payments so that you won’t owe taxes and penalties at the end of the coming year.

THE MORTGAGE INTEREST DEDUCTION

If you retained your home in the divorce agreement and are still paying off the mortgage, we have good news for you: You can write off the interest rate on your mortgage payments thanks to the tax credit known as the mortgage interest deduction. (Please note that you may not write off the principal amount you pay on the mortgage, just the interest!)

TAXES ON YOUR RETIREMENT ASSETS

If you plan to cash out a 401(k) plan in order to give money to your ex-spouse, the IRS considers that taxable distribution and you will have to pay the tax.  

However, if you transfer any of your retirement assets to your ex-spouse under the Qualified Domestic Relations Order (QDRO), the funds will be transferred directly from your IRA to your ex-spouse’s IRA and will give your ex-spouse the right to the funds while also relieving you of the tax burden. To avoid any complications, this transfer should be spelled out in your divorce decree or property settlement agreement.

EXEMPTABLE LEGAL FEES

More good news! If you have questions about your taxes after going through a divorce, your consultation with Cabanillas & Associates is free. (All Cabanillas & Associates consultations are free!) After that, any fees paid for legal advice associated with the tax consequences of your divorce can be taken as an itemized deduction on Schedule A of your tax return. This is also true of any fees you incur to obtain alimony.