When they get married, no one wants to entertain the thought of getting a divorce. But, the reality is that 40-50 percent of all marriages end this way.
Going through a divorce is incredibly stressful, not just mentally and emotionally, but also financially.
Not only do you have to worry about dividing assets and possibly paying alimony and child support, but you also have to worry about how the divorce will affect the process of filing your tax return.
If you’re currently going through a divorce and are feeling overwhelmed about how to handle your taxes, keep reading.
Explained below is everything you need to know about divorce and taxes.
How Does Divorce Affect Your Taxes?
There are many ways that a divorce can influence the way you file taxes. Some specific effects include:
First, a divorce obviously affects your filing status. When filing your taxes, be sure to consider the actual date when your divorce became final.
If by December 31 of the tax year, you were not divorced or legally separated, the IRS requires you to still file as Married Filing Jointly or Married Filing Separately.
On the other hand, if you were divorced or legally separated by December 31, the IRS considers you to have not been married for the entire year. If this is the case for you, you’re able to file as Single or Head of Household.
If you have a qualifying dependent (or dependents), you will only be able to claim them on your tax return if you are the custodial parent.
If you and your ex-spouse are separated (but not divorced or legally separated), you can both claim your child or children as dependents on your tax returns.
A divorce also changes your ability to deduct IRA (independent retirement account) contributions.
If you and your ex-spouse were not divorced or legally separated by December 31 of the tax year, you can deduct any of the contributions you made to his or her IRA from your tax bill.
If you were legally separated or divorced by this date, you’re only able to deduct the contributions you made to your own IRA.
Health Insurance Coverage
If you lose insurance coverage when you’re going through a divorce, you will typically be allowed to enroll for health coverage through the online marketplace.
This then allows you to report that you had health insurance throughout the year when you’re filing your taxes. As a result, you won’t have to pay a penalty for not having coverage.
Tips for Handling Divorce and Taxes
As you can see, there are a lot of ways that a divorce can affect your tax returns. You might be feeling pretty overwhelmed right now thinking about all the new factors you have to take into account.
If you’re feeling lost, start by taking these steps. They’ll help you stay sane during tax season:
Gather Your Account Statements Early
The first step you can take to maintain your sanity while filing your taxes is to start early.
Gather your account statements as soon as possible and keep them in a special folder or binder. That way, you know right where they are and don’t have to waste time digging through drawers or boxes to find what you need.
Be sure to gather as much information about your finances as you can.
In addition to your basic income documents, this also includes information regarding your home, retirement and investment accounts, cars, and other tangible assets.
Consider Hiring a Professional
By this point, you already know that filing your taxes after or while you’re going through a divorce is complicated.
Hiring a tax accountant or financial analyst can help you navigate this unfamiliar terrain and make sure everything is handled correctly.
A professional can also help you find other potential deductions that you might have overlooked otherwise. There are also many other financial experts who specialize in helping people who are filing after a divorce.
Remember that Child Support is Not Deductible
If you’re currently paying child support, it’s important to keep in mind that these payments are not deductible and can’t be written off of your tax returns.
Remember, too, that if you’re on the receiving end of these payments, they are not considered taxable income.
Make Plans for Your House
When you’re getting a divorce, one of the biggest obstacles you’ll face is trying to figure out what to do with the house.
If you’re planning to sell your house, it’s typically best to do it while you are still married.
If your filing status is Married Filing Jointly, the IRS will exempt the first $500,000 of gains on the sale of your home.
If you’re filing as single, the IRS will only exempt the first $250,000. The remainder of the money from the sale will be taxable.
Keep in mind that this rule typically only applies to your primary residence.
Communicate with Your Ex
Finally, be sure to communicate with your ex-spouse during this process.
It’s not easy to do, especially if you had or are going through a less-than-amicable divorce. But, the more open and mature you’re able to be while going through the tax filing process, the easier it will be.
Remember, at the end of the day, it’s easier for both you and your ex-spouse if you can communicate clearly while filing your taxes. After all, both of you have to file tax returns. You might as well work together to get it done as quickly and painlessly as possible.
As you can see, handling taxes when you’re going through a divorce can be quite frustrating. But, if you keep this information in mind, you’ll have a much easier time handling divorce and taxes.
Do you want to learn more about preparing your tax returns?
Whether you want to learn more about the effects of divorce on your taxes or just need help to file your return, we’ve got resources for you.
Check out the personal taxes section of our website today for all the information you need to become tax-savvy.