Going through a divorce is difficult for myriad reasons. One of the most daunting realities is the task of untangling your finances from your ex-spouse’s. I recently learned firsthand that this can be a complicated and emotionally difficult experience. Initially, my biggest financial concerns were covering the mortgage on my own and creating a new budget for myself. Then tax season rolled around.
I quickly realized that when your marital status changes, filing your tax return can go from a straightforward process to a tricky situation. Everyone’s experience is different but addressing potential roadblocks as soon as possible can help ease the proceedings. Here are some important questions you may want to review with a financial professional about how divorce can impact your tax return.
Should you file together or separately?
Your filing status will depend on your situation. If you were still married as of December 31 of the previous year, you can file jointly if both spouses agree. Doing so allows you to take advantage of a higher standard deduction. However, it’s wise to address beforehand how the two of you will handle a potential tax liability or refund. It may be something you wish to split down the middle, or it could be divided differently based on what you both agree is fair. Your divorce attorney can help you get these details in writing prior to filing your taxes.
If you choose to file separately, this effectively separates your tax liability (or refund) from your ex-spouse’s. You may prefer this option if you’re looking for a clean break or if you have other concerns about filing a joint tax return.
If your divorce was finalized before the end of the previous tax year, you can file as head of household if you meet certain IRS criteria. Doing so allows for a larger standard tax deduction and wider tax brackets as compared to filing as a single person. To qualify, the following must have applied during the previous tax year:
- You and your ex-spouse did not live together for the last six months of the year.
- You were responsible for more than half of the cost of maintaining your home.
- Your home was the primary residence of a qualifying dependent child for at least half the year.
Those who don’t qualify for head of household status will file as a single taxpayer.
Will my tax rate change?
You may notice a change in your tax rate after getting divorced. That’s because income limits for each tax bracket are lower for single filers. Let’s say, for example, that you earn $100,000 per year while your ex-spouse earns $40,000. Filing jointly as a married couple would put your tax rate at 22 percent. But when filing as a single person after your divorce, your tax rate would actually jump to 24 percent — and your ex-spouse’s would fall to 12 percent.
Who claims the children as dependents?
This is simple enough when filing jointly as a married couple. If you’re divorced or separated, the custodial parent is usually the one who’ll claim the children as dependents, but keep in mind that laws can vary from state to state. The custodial parent is the one the children lived with the most during the tax year in question. For ex-spouses who split custody 50/50, this is the parent with the higher adjusted gross income. The noncustodial parent can still claim the children as dependents if the other parent signs an IRS form agreeing to this arrangement.
This is an important point to consider because claiming your children on your tax return allows you to take the child tax credit. For 2022, families with children aged 17 and under could receive up to $2,000 per qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return). If you have a higher income, you may be able to claim a partial credit.
The parent claiming the children might also qualify for the child and dependent care credit. Depending on your income, for 2022, this could translate to a credit of up to 35 percent of eligible childcare expenses, depending on your income. Qualifying expenses cap at $3,000 for one dependent; $6,000 for two or more.
How are alimony and child support taxed?
If you received alimony (sometimes called spousal support) during the previous tax year, you are not required to report this money as income on your tax return. What’s more, the person paying the alimony cannot write it off as a tax deduction, which was possible prior to 2019. Similarly, child support payments are not considered taxable income and aren’t tax-deductible for the payer.
However, the parent who receives alimony and/or child support may choose to include it as income when applying for new financing. Mortgage lenders, for example, may factor these payments into your monthly earnings, which can improve your chances of getting approved. On the flip side, these payments will count as recurring debt for the person who makes the payments.
Filing your tax return can be complicated — even more so if you’re navigating a divorce. It’s a good idea to consult with a tax professional to fill in the blanks and confirm you’re doing things the right way. This is also a good time to make a new financial plan for yourself moving forward. A financial advisor can help you make sure you’re taking the right steps to set yourself up for financial success as you move forward.
This article is not intended as legal or tax advice. Northwestern Mutual nor its Financial Representatives provide legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.