Going through a divorce can be a tough, long, and more often than not, complicated process. In the US, more than 40% of marriages end up filing for a divorce at some point. With such a rate, we must wonder what the effects of divorce on taxes really are. Therefore, we’ve come up with this brief summary of several aspects to consider before filing for a divorce.
There are several effects of divorce on taxes that we must be aware of if we are going through the process of ending our marriage. To begin with, we will have to think about the date, as this will impact our filing status. Then, we need to know what filing status we’ll opt for, either as single or head of household. Also, we need to understand the role of alimony, child support, and dependent child credits will play after a divorce.
Whenever we decide to end a marriage, many different aspects of our life change, sometimes drastically. The same happens with our tax situation, and we need to prepare for all the different adjustments we’ll have to face. To begin with, the date on which we decide to complete our marriage won’t really make a difference. This is because the IRS considers you unmarried during the complete year even if your divorce process ended by Dec. 31st. However, you must consider the total income you’ll file during the year of your divorce in order to settle on a completion date beforehand.
One of the most relevant effects of divorce on taxes is that it can change the status we’ll use when filing our income report. As we mentioned before, if our divorce was final by Dec. 31st, the IRS will still consider us unmarried during the entire year. If we haven’t been able to finalize our divorce by the end of the tax year, we can decide to file as married filing jointly or separately. However, once our divorce is final, we must file as either single or head of household. Such status will bring us many benefits, including a higher standard deduction, a lower tax rate, and even eligibility for some other tax credits.
After our divorce has been processed, we still need to take care of taxes on alimony and child support payments. In the case of alimony, the ex-spouse who pays for it will be able to take a tax deduction for such payments. However, the IRS will only consider alimony payments that we make in cash, and that a divorce agreement requires. On the contrary, child support payments do not qualify for a tax deduction for the person paying it. Also, the recipient of child support payments doesn’t have to pay income taxes on such amounts.
One of the effects of divorce on taxes that most couples tend to contend about is claiming children as dependents. This is because we are able to qualify for several tax exemptions and benefits when we claim for child dependents. One example is the child tax credit that parents or guardians of dependents can get up to $2000 as a tax credit for every child. In order to be eligible for such credit, the child must be under the age of 17 and lived with you for more than half of the tax year.