If Your Divorce Was Not Finalized in the Tax Year
If you are divorced or in the midst of the divorce process, you will need to consider some tax issues from a different angle. Your choices for filing status may be different, and certainly, the implications will have changed. While each couple’s tax situation is different, here are a few issues you should prepare to address.
You may feel financially separated from your estranged spouse, but if your divorce was still pending as of December 31, 2021, then the IRS considers you a married couple for that tax year. That means you cannot file “single.” You need to file jointly or as “married filing separately.”
It makes sense to compare the results from filing jointly versus separately to see which option provides the greatest tax savings. Many IRS tax credits and deductions are limited for couples who file separately. However, there are instances where separate filing produces a better bottom line. Your accountant is the best person to do these calculations for you.
If You Are Divorced, You May Be Able to File as Head of Household
If you are divorced and are filing single, you may be able to file as “head of household” and receive better tax rates than other single filers. You may file as head of household if:
- You support a dependent parent or have a “qualifying person” live with you for at least half the year
- You pay at least half of the cost of keeping up your home
- You are considered “unmarried” on the last day of the tax year
The IRS has complex rules about when someone you support can be treated as a “qualifying person.” If the person is a child, only a custodial parent can claim head of household status. In cases where parents share custody, only one of them may file as head of household using that child as the qualifying person, even if they have separate households. Your attorney should help you arrive at an agreement that makes it clear which parent will be deemed the custodial parent and can claim head of household status.
Other Tax Issues to Consider
Homes
If you and your ex sold a home together or plan to in the future, there may be capital gains taxes owed. These need to be addressed in your written settlement agreement. Similarly, if there are back taxes owed or you have tax liability for the current year, you need to allocate that cost.
Tax Losses
If there were tax losses claimed in prior years, the party who owned the asset that sold at a loss is the only one who can claim the loss in future years. If there are significant losses that only one party can take advantage of, your divorce attorney needs to help you negotiate how that will be factored into your overall settlement agreement.
Children
Couples with children need to understand how they will be handling tax credits associated with the children. The IRS automatically allows a custodial parent to claim the benefits in many cases, but that parent can waive the right using the appropriate release form.
Spousal Support
While spousal support (or alimony) is no longer a deductible expense under Federal law, it is still deductible under New York State law. To protect the spouse’s right to deduct spousal support he or she pays (and ensure that the other spouse is paying taxes on the spousal support received), we highly recommend making that fact clear in your settlement agreement.
Many Tax Problems Can Be Avoided with the Help of an Experienced Divorce Lawyer
While divorce attorneys cannot give tax advice, we do know what issues need to be addressed. If you are in the middle of the divorce process, now is the time to talk to your lawyer and accountant about tax issues that are relevant to your circumstances.
To find out how the experienced team at Vacca Family Law Group can help negotiate an agreement with your ex that properly addresses tax issues and other challenging divorce-related issues, contact our office today to arrange a confidential consultation.
