How Can a Divorce Alter Your Tax Situation?

Divorce may lead to many significant changes in your life, from effects on your finances to substantial modifications to your parenting routines. It can be important to consider and plan for these shifts in circumstances that may occur during and after the divorce so you can successfully navigate any challenges. Thorough tax planning is one step that can be essential for your continued economic stability. A knowledgeable Georgia divorce attorney can walk you through the filing status changes that can accompany divorce and provide guidance on other tax issues you may encounter. Understanding these tax implications can help you make informed decisions and avoid potential financial pitfalls.

How Do You Determine Your Tax Filing Status?

You must choose the correct filing status when filing your yearly tax return. Your filing status determines your tax rate and may provide eligibility for certain deductions and credits. If individuals qualify for more than one status, they typically select the category that will result in the lowest tax burden. The five potential filing statuses are:

  • Single
  • Married filing separately
  • Married filing jointly
  • Head of household
  • Qualifying surviving spouse

Your marital status on the last day of the tax year (December 31st) determines your filing status for that year. If your divorce has been finalized prior to December 31st, you’ll file as a single individual. However, if your divorce is still pending at year-end, you may have the option to file jointly with your spouse.

If your spouse agrees to file jointly, you could receive some tax benefits, such as access to certain deductions and credits. However, it’s essential to consider the potential risks of joint filing, especially if you have concerns about your spouse’s financial honesty. In such cases, filing separately might be the safer option.

Filing as “head of household” after a divorce can offer tax advantages for those who qualify. To be eligible, you must be unmarried at the end of the tax year, pay more than half the expenses for keeping a home, and maintain a household for a qualifying dependent for over half the year. This status typically provides a higher standard deduction and lower tax rates than filing as single.

How Can You Mitigate the Effects of a Change in Filing Status After a Divorce?

Depending on your income and other factors, the differences between filing as a single individual versus filing as a married couple could lead to a significant increase in taxes. It’s key to sit down with a tax professional to understand the potential consequences of your divorce on your taxes and discuss strategies for reducing adverse effects. Topics you may wish to explore include, but are not limited to:

  • Reviewing your withholdings and estimated tax payments. Your tax liability could change significantly with a new filing status. You may need to update your W-4 with your employer to ensure the correct amount of tax is being withheld based on your new filing status to avoid underpayment penalties
  • Considering the timing of asset transfers: Proper planning of major financial decisions can help minimize tax impacts in the year of divorce and beyond
  • Contributing to retirement accounts: Placing money into traditional IRAs or 401(k)s after the divorce is finalized can reduce your taxable income
  • Planning the sale of marital assets: If you’re selling your home or other high-value assets as part of the divorce, it can be useful to do so while still legally married to maximize the capital gains exclusion
  • Understanding the current tax treatment of spousal and child support: For all divorces finalized after December 31st, 2018, spousal support (alimony) is no longer deductible by the payer or taxable to the recipient. Child support remains tax-neutral; it is not deductible or taxable

How Can Your Parenting Agreement Impact Your Filing Status and Taxes?

Determining who can claim children as dependents for tax purposes is a crucial consideration in divorce. Generally, the custodial parent will have the right to claim the child as a dependent because the child resides with them for more than half the year. As the caregiver for a qualifying dependent, the custodial parent may be eligible to file as head of household, which may have tax advantages.

However, divorcing couples can agree to alternate the benefit of claiming a child as a dependent or allocate the arrangement differently in their divorce settlement. For example, if you are caring for a dependent parent, you may already qualify to file as head of household. Under these circumstances, claiming a child may be less financially important to you, and you could potentially negotiate the topic to achieve other divorce outcomes you care about.

The child tax credit is another valuable tax benefit that divorced parents should consider. As of 2021, only one parent can claim this credit per child per year. Couples with multiple children may choose to divide these credits, alternating them year by year or assigning specific children to each parent for tax purposes. Your lawyer can evaluate your tax situation and advocate for your best interests.

How Can an Experienced Divorce Attorney Help You Prepare?

No one wants to pay more in taxes than is absolutely necessary. An unexpected increase in how much you owe the IRS after a divorce can cause stress or even lead to financial struggles. Accurately determining how various aspects of your divorce could impact your tax liabilities now and in the future is vital to protecting your finances. Unfortunately, tax laws are complex, constantly changing, and often problematic for individuals to navigate on their own.

A knowledgeable divorce attorney from Hecht Family Law can guide you through these complicated issues, ensuring that crucial tax implications are properly considered in all areas of your divorce agreement. Our skilled lawyers can work in conjunction with tax professionals and financial advisors to build a customized strategy that addresses changes in your filing status and other divorce-related adjustments that could affect your tax burden. Discover how we can put our extensive legal knowledge to work for you! Schedule your complimentary case evaluation by contacting our helpful team today at 470-291-5342.