If you're considering filing for divorce, or are already in the midst of divorce proceedings, you may be wondering how you should handle this situation at tax time. Taxes can be complex even under ideal circumstances. When you're dividing up assets and establishing new homes, they can be even more complicated. Read on to learn more about the rules and regulations governing tax filings for divorcing couples, as well as tips to help make the process easier for both you and your ex-spouse.
How are taxes handled for divorcing couples?
Fortunately or unfortunately, many couples go through this situation. Because of this, the Internal Revenue Service (IRS) and tax preparation specialists have provided much guidance on this issue. The rule for filing status is simple -- as long as you were married as of December 31 of the previous year, you must file married status (either jointly or Married Filing Separately). If your divorce was finalized before December 31, you're unable to file Married status, even if you were married 364 days of the previous year.
If your divorce was finalized in the previous calendar year, you can choose between filing as Single or Head of Household (if you provided more care for your dependent child than your spouse provided). Sometimes the choice in filing status can save (or cost) you hundreds of dollars, so it's important to run both scenarios to see which offers more favorable tax treatment. If you have a dependent child and file Head of Household, you may also be eligible for additional child-related tax credits.
If your divorce hasn't been finalized yet, Married Filing Jointly can usually lower the total amount of taxes imposed. However, this also makes you jointly liable for the return -- so if you're not made aware of all your spouse's income or expenses, you may be equally on the hook for any potential penalties.
Selling a home or liquidating retirement accounts (both of which are sometimes required as a condition of the divorce decree) complicates the situation. If this is the case, you should ask your divorce lawyer for advice on how to handle this reporting on your taxes -- or ask for a referral to a tax specialist.
How can you make the process easier?
Although divorce -- like filing taxes -- can be financially and emotionally difficult, there are a few things you can do to make the process easier.
- Keep good records
- The last thing you want at this time is an audit -- so keeping thorough records of all financial transactions will help you in the long run. Whether you prepare your own taxes, use a program, or pay a tax professional, you'll benefit from having an organized accounting of income and expenditures. (This can also help you set up an adequate post-divorce budget.)
- Decide how to divide
- If you have dependent children, be sure the divorce decree specifies which of you can deduct your child or children in a specific year. Often, if there is more than one dependent child and you and your spouse have equal custody, courts will permit you each to "divide" the children so that you can each claim one or more.
- Also be sure that your decree dictates (or you and your spouse agree) how any potential tax refunds or burdens will be divided. If you filed jointly but are divorced at the time your refund comes, make sure the check is made out to both you and your spouse -- and if you owe on April 15, be sure the court has specified who is responsible for payment of these taxes.
