The aftermath of a divorce can be a difficult time for people. Paying taxes is usually a hassle for most everyone. Put the two of them together and you have the makings of a first-rate headache. But even though taxes and divorce mix about as well as oil and water, the issues they raise still have to be figured out. If you were divorced in 2021, there are some pertinent facts you need to know regarding the tax return you’ll file next month.
Tax Filing Status After a Divorce
The first thing to point out is that, for federal tax purposes, the only day that matters as far as your marital status is December 31. If you were divorced on that day, you are considered divorced for the entire year. If your divorce was finalized the first week of January, you’ll still be considered married for this year’s taxes.
If you and your ex have children, the biggest issue is who will get to file as Head of Household. This is a filing status with a lot of benefits. The standard deduction is higher, and you become eligible for additional tax credits. But to claim Head of Household status, you have to qualify. The most common way of qualifying as the head of a household is to have dependents.
For tax purposes, children can be claimed as a dependent by just one parent. Who can claim the kids as dependents was likely decided during the divorce settlement. If one parent has primary physical custody, that parent will be considered the Head of Household.
There are situations where physical custody is shared. Maybe the kids spend one week with your ex and the next week with you. Who is the Head of the Household then? The answer is that you and your ex have to work that out. It’s not uncommon for there to be an agreement that one parent claims the kids as dependents in one year, with the other doing so the next year. If you have two children, you each might claim one.
The Divorce Property Settlement & Taxes
It’s likely a lot of assets changed hands or at least had one person’s name dropped from them as a part of the settlement. Stock portfolios had to be divided up in the divorce settlement, as did other financial assets. The good news is this–the general rule is that property transferred during a divorce does not impact your taxes.
There are scenarios where this might not be true. For example, if a 401(k) was cashed out and paid to one spouse as a part of the settlement, that withdrawal has tax consequences. But those consequences are no different than they would be for any other 401(k) withdrawal prior to retirement age. The divorce per se and the large transfer of assets that may have accompanied it, do not have a direct impact on taxes.
The same goes for the transfer of a house into the name of whichever spouse will stay there. Of course, that presumes one of the spouses will, in fact, stay in the house. What if the house is sold and the money shared between the spouses?
You and your ex get a break in that the IRS will allow you to exclude up to $500,000 in shared profit ($250,000 per spouse) from capital gains taxation. The average home sale here in Pittsburgh is only a little over $200,000. Those who sell homes in places like the North Shore or Squirrel Hill might go over that half-million threshold, but many others will be able to keep all their home sale profits.
Taxes, Alimony & Child Support
The tax reform changes that passed Congress in 2017 and were signed into law by then-President Donald Trump had a significant impact on how alimony and child support are treated.
The person who receives child support or alimony does not have to report them as income. Conversely, the person who pays, cannot claim these items as a deduction. This a reversal of the earlier rules and applies to any divorce finalized through 2018.
Decisions made during a divorce settlement have ripple effects that linger all the way through tax season. That makes it all the more important to make sure all factors were considered in the division of property, in child custody and what the impact of both would be on your tax return.
The time to think about these things is before the settlement is finalized. That’s what we do at Notaro Epstein Family Law Group, P.C. We have a team of experienced and accomplished divorce lawyers who understand how to fight for their clients’ interests in a divorce settlement. Call us today at (412) 281-1988 or contact us online to set up an initial consultation.