How Will a Divorce Affect Your Taxes?

Uncontested Divorce Mediation

Posted February 28, 2019

Are you getting ready to file your taxes for the first time since your divorce? You likely have some questions about how divorce mediation in Denver is going to affect the way that you file your taxes and how much you’ll pay. What will your tax status be this time? Who gets to claim credit for your dependent children? And are there any deductions that could help you save on your tax bill? In contested divorces, taxes can become more complicated and expensive due to the negotiations around splitting assets and arranging parenting orders. Uncontested divorces, often completed through mediation services can work through many tax questions before the divorce is final. This may make the filing process a little easier on both parties.

You will likely choose to retain the help of an accountant to ensure you are completing your paperwork correctly. There are some things that you can do on your own, however, to help better prepare to file your first post-divorce tax return. That includes doing some research as well as taking care of some big decisions before your divorce is final.

Determining Your Status

It’s one of the first questions on your tax form. For the recently divorced, it’s also one of the trickiest. Are you married and filing jointly, married and filing separately, or filing as an individual person? Your marital status on December 31st of the previous year will determine your tax status. If you were still married but separated, then you will still file as married. If you finalized your divorce before December 31st, then the federal government will consider you divorced for the entire tax year. You will file as a single individual.

If you separated and didn’t finalize the divorce by the end of the year, you and your spouse will have a couple of options. You can choose to file either as married but filing separately or married and filing together. It’s worth a discussion with an accountant to determine which option will be better for your personal situation.

TurboTax suggests that if you are filing independently, check to see if you meet the requirements as “head of household”:

• A dependent lived with you more than half of the tax year
• You paid for more than half of the costs of running your household

If you qualify, you’ll get a bigger standard deduction on your taxes, which could result in a bigger return. 

Who Gets the Credit for Dependents?

The next major consideration to take into account is who will claim credit for any dependent children on the tax return. Claiming dependent gives you a pretty big tax credit, currently $2,000 per minor dependent. Nerd Wallet notes that you qualify for this tax credit if you make under $200,000 a year filing as a single person and $400,000 a year filing as married. The tax credit lowers your total tax obligation and could help you avoid paying anything extra. But since the law only allows one person to claim the dependent credit, who gets it?

Usually, the parent with whom the child lived with the most during the tax year claims the credit. However, there are exceptions to this rule. The parent who is the primary custodian can agree to allow the other parent to claim the credit on their taxes, instead. The custodial parent will need to sign documents saying that they have agreed to this arrangement and won’t try to also claim the credit.

What Happens With Alimony and Child Support

Alimony and child support payments are two new tax considerations you may have after your divorce. It’s important to understand the tax implications of the two, as they are very different from each other:

• When it comes to alimony, if you are making payments to your spouse as arranged in a Denver divorce mediation decree, the amount is tax deductible. If you have an informal arrangement with your spouse, then the amount is not deductible. That may encourage you to formalize arrangements legally. If you are receiving alimony payments, the money is taxable as income.
• Child support works the opposite way. It is neither deductible nor taxable as income. 

Divorces that are finalizing in 2019 will have different rules, though. According to Credit Karma, alimony will no longer be deductible or taxable under federal tax law. 

How to Handle Split Assets

One of the biggest hurdles couples face in a divorce is how to split their assets. How they end up doing that will have an impact on their taxes later on. You should keep taxable assets in mind before you complete your divorce. That’s because some assets could carry costly tax implications with them. It’s good to know what they are and how much to expect before accepting a deal.

These are just some general guidelines. It’s likely to be in your best interest to speak to a tax professional about your specific situation.

• Your house. If you sell your house, you may have to pay capital gains tax on the profit. The good news is there are laws in place that can help you reduce your tax obligation on the sale of a home due to divorce. If it was your primary residence for at least two years, you should be able to exclude up to $250,000 from capital gains taxed. Alternatively, if you transfer the house into one spouse’s name and it is not sold, there won’t be any taxes to pay from the transfer.
• Retirement accounts. Many spouses end up using their 401(k) accounts to financially settle with a spouse. This may be your only option, but be aware that these accounts carry high tax penalties. Talk to your accountant or lawyer before using that money. 

Making Your Taxes Easier Before Your Divorce is Final

You’ll have a lot to think about when going through divorce mediation in Denver. Even uncontested divorces come with big tax ramifications. But when you work with an experienced divorce lawyer or divorce mediator in Denver, it can be easier to find the process the changes. These professionals can guide you through these questions, arriving on mutually agreed upon answers to big tax questions. In a time that is almost certainly an emotional one for both of you, it can give you peace of mind knowing that these questions are being answered.

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