A divorce changes many things about your life, including your taxes. Whether you find yourself at the beginning, middle or end of your divorce process, it may help to gain an understanding of how being single again can affect the filing of your taxes.
The first thing you need to know involves your filing status as of Dec. 31. If you finalize your divorce by that date, or even on that date, you do not have to file as married for that tax year. Conversely, if your divorce remains in progress as of Dec. 31, you must still file as married.
How the division of your property affects your taxes
During the property division portion of your divorce proceedings, you may split several assets that could affect your taxes.
- The marital home: If you and your spouse agree to sell the marital home, timing is everything when it comes to your taxes. If you remain married on Dec. 31, filing your taxes together increases your capital gains exclusion to $500,000 if you lived in the home at least two years within the last five years. Otherwise, you may exclude $250,000 filing as single under those circumstances.
- Retirement accounts: In order to avoid incurring a penalty for an early withdrawal from a qualifying retirement account, you need a qualified domestic relations order from the court. This allows the one-time withdrawal out of your retirement account and into your former spouse's account without penalty. You do not need such an order for an IRA as long as you specifically address any distributions in the divorce settlement.
Other assets may also require a shift in your tax basis. Every case is unique, and it may help to have a California tax attorney review your settlement to determine what tax implications you face due to your divorce.
Tax exemptions and deductions
After the divorce, the exemptions and deductions you take could change. For example, consider the following:
- Medical expenses: Even if your former spouse is the custodial parent, if you continue to pay medical expenses for the children, you can add them to yours on your tax return.
- Dependent exemptions: If you had physical custody of the children the majority of the year, you may claim them on your taxes. In the alternative, the custodial parent could waive his or her right to claim the exemption so that the non-custodial parent can use it.
- Alimony/spousal support payments: If you make cash payments to your spouse in accordance with your divorce settlement, you may deduct those payments, regardless of whether you itemize. If you receive such payments, they get included in your taxable income.
- Child support payments: Neither party may deduct or include such payments on their tax returns.
- Tax credits: If you claim the exemption for your child, you may also claim the appropriate tax credit for each child. As the custodial parent, you may take other credits even if you don't claim the exemption.
You may also qualify to file as head of household if your divorce is final by Dec. 31. Your divorce could require other changes in your taxes. In order to know for sure, you may benefit from talking to a tax attorney to help ensure that you receive the most benefits possible and only pay as much tax as you have to from your new filing status.