It’s tax time once again. If you and your spouse divorced sometime during the past year and it was finalized before December 31, 2020, you need to be considering changes in how you file your taxes for the year 2020.
What is Your Tax Filing Status Now?
If you were still legally married as of December 31, 2020, you might still want to file a joint return. Filing jointly can offer some tax benefits to you. There is a downside, however, in that you may be jointly and severally liable for any taxes due if your spouse has been dishonest regarding his or her income or deductions. You will want to discuss this with your divorce lawyer to weigh the pros and cons as they apply to your situation.
If your divorce was executed any time during 2020, the Internal Revenue Service will now consider you single. That means when filing your taxes for the year, you must decide between a single status or head of household status. This will require some further considerations for you.
Requirements for Filing as Head of Household
Head of household status will offer some tax advantages with a higher standard deduction, some additional tax credits, and even a lower tax rate in some cases.
To qualify for head of household status, you must have been unmarried as of December 31, 2020, but also paid at least half of the household expenses during the year. You must also have a qualifying individual living with you, such as school-age children, parents you support, or adult children you still claim as a dependents.
You may also qualify for head of household status if your divorce was not finalized by December 31, but the IRS considers you unmarried. This can be the case if you stopped living together before the last six months of the tax year and you paid over 50% of household costs.
Who Claims the Children as Dependents?
You must understand that you and your ex-spouse can’t both claim the head of household using the children since they can only be dependents on one parent’s taxes. Usually, that parent will be the custodial parent and will be explicitly named in the divorce decree, although there may be exceptions.
This offers tax benefits such as the child tax credit, credits for childcare and dependent care costs, and the earned income credit. Even if the custodial parent allows the noncustodial parent to claim a child as a dependent, this does not allow the noncustodial parent the benefit of head of household status.
Reporting Spousal and Child Support
Child support payments are not tax-deductible or considered taxable income.
As for spousal support (previously known as alimony), the tax laws changed under the Tax Cuts and Jobs Act. For divorce decrees or modifications executed prior to December 31, 2018, alimony is both tax deductible for the payer and considered taxable income for the recipient. For those executed after December 31, 2018, alimony is no longer tax-deductible or regarded as taxable income.
Profits on the Sale of Your Home
Many divorces require selling the home to divide assets. If you come away from the sale with a large profit, this may have tax implications in the way of capital gains. Fortunately, there are exclusions for these. For unmarried individuals, the capital gains exclusion is $250,000 when a primary residence is sold. For married couples, the exclusion is doubled at $500,000 if you sell the home while still filing jointly.
If you don’t sell before the divorce, both individuals can exclude up to $250,000 separately in capital gains. If one party retains the home and sells after the divorce, that individual can exclude only the $250,000 as a single person.
Another division of assets during a divorce involve retirement accounts. Spouses may have the right to a share of the other’s retirement benefits. Because retirement funds are not always immediately accessible, the court will issue an order, called a qualified domestic relations order, to advise the administrators of the accounts that a portion of the funds must be paid to the ex-spouse. The order will set out the schedule and the amount of benefits that will be paid to the other spouse.
Talking it Out – Understanding Tax Implications From a Divorce
During or after a divorce, it is critical to clearly understand how your divorce will affect your taxes. If you have any questions, you should contact your tax professional or your divorce attorney.
Navigating divorce is never easy. If you need assistance with crafting a divorce with as little tax implications as possible, we can help. Contact the skilled Illinois family law team at the Law Office of David A. King, P.C. to discuss your unique situation.