Going through a divorce can be both emotionally and physically draining. There are many challenges to face during and after, including untangling your financial situation. Following a divorce, especially one that gets complicated, tax issues become even more complex and confusing than they already were. Work closely with your accountant to make sure you take all necessary steps to file your taxes accurately. Things to consider include the following items.
Your Filing Status
Your tax status is determined by the condition of your marriage on the last day of the year. If the divorce has been finalized anytime before December 31st, you can file as single or head of household for that year. However, if your divorce is not finalized by the end of the year, you still register as married to the IRS and must file your taxes accordingly.
If you have at least one child and meet a few small requirements, you can file as head of household and receive a tax deduction. To qualify, you must meet these conditions:
- Your divorce must be final
- You must have paid more than half the cost of maintaining your home for the year.
- Your former spouse must not have lived in your home for at least six months of the year.
You can also claim dependency exemption if your child lived with you in your home for the majority of the year.
Child Support And Alimony
If you are obligated to pay child support, it is important to know that it is tax neutral. Alimony, however, is taxable income, and if you keep track of each month’s total, it can be deducted. If you are the one receiving the alimony, be sure to include into your total income for tax purposes. Many couples negotiate the levels of child support and alimony to better leverage tax liability due to the many odd tax requirements of a divorce. Work closely with your accountant to understand the best possible outcome available to you and your former spouse.
Going through a divorce can become an expensive legal process, but legal fees are generally not deductible. There may be a small break if you paid legal bills to secure taxable income, such as alimony. However, other legal fees that do not produce taxable income cannot be deducted.
Legal fees that you paid to receive tax advice can be deducted. This is included in the miscellaneous section on your Schedule A, and can only include up to 2% of your adjusted gross income.
While financial and tax issues are not always the most important things on your mind during a divorce, it is important to understand the legal steps you must take. Speaking with your accountant can ensure as few headaches as possible when dealing with your financial situation after a divorce.