When you’re married, filing your taxes jointly offers many benefits. However, when you divorce, your taxes could increase if you’re not careful. Here’s how to avoid taking a hit on your taxes.
Your Filing Status
Chances are, when you got married, you decided to change your tax-filing status to filing jointly. How do you file once divorced, however? You can either choose to file as head of household or as a single (or individual) taxpayer. Here are the key differences:
- Single – An unmarried individual with no dependents or who at least doesn’t pay the bulk of the costs to care for one
- Head of household – An unmarried individual who pays the majority of costs to care for at least one dependent
You receive preferential treatment on your taxes for filing as head of household, including a potentially lower tax rate and greater likelihood of qualifying for certain tax credits and deductions. Therefore, if you have any children who depend on you financially, you can benefit from filing this way. This is particularly true for filers in the lower income brackets.
What Qualifies as Divorced?
It may seem a simple question: am I divorced or aren’t I? As far as the IRS is concerned, however, you are only divorced for tax purposes, meaning your tax-filing status needs to change if you are in possession of one of the following documents by the final day of the tax-filing year in question (in this case, December 31, 2021):
- An annulment
- A decree of separation management
- A final decree of divorce
What if I don’t qualify?
If you and your former spouse don’t have any of the above-listed documents qualifying you for unmarried status in the eyes of the IRS, you have two options for filing your taxes:
- Continue to file jointly
- File separate tax returns using the status of “Married Filing Separately”
Suppose the relationship between you and your ex-spouse is still amicable. In that case, you can benefit from continuing to file jointly, as it is generally the easier of the two options and often the cheaper as well.
Income Brackets and Tax Rates
Income brackets and the corresponding tax rates associated with each differ for single filers and heads of household than for married joint filers. In other words, even with the same income, your tax rate as a single filer or head of household may not be the same after your divorce as it was before your divorce.
Since the income limits within each bracket are higher for married couples filing jointly than for those other filing statuses:
- If your spouse earned more money than you, you may either drop to a lower tax bracket or stay in the same one,
- But if you earned more money than your spouse, you may end up paying a higher tax rate.
Tax Credits and Deductions
There are several tax credits and deductions you are eligible to claim following divorce that you couldn’t claim while you were married. By the reverse token, you may have claimed certain credits as a married couple for which you no longer qualify as a newly single individual again. In many cases, the deciding factor in determining eligibility for these credits is whether or not children are involved and, if so, which parent has custody.
Tax Credits After Divorce
Typically, the custodial parent can claim the following credits unless formally signing over these rights to the non-custodial parent using IRS Form 8332 or a written declaration containing the same information. Any specific dollar amounts listed are for heads of household and single filers in 2021:
- Child Tax Credit (CTC) – If you make no more than $200,000 per year, you can receive a credit of up to $3,600 per child up to a certain age. Qualifying filers can receive these payments in an annual lump sum or monthly payments.
- Credit for Other Dependents (ODC) – If you care for a parent or other dependent who doesn’t qualify for the CTC, you can receive a tax credit of up to $500 for each qualifying legal dependent.
- Child and Dependent Care Credit – You can receive a refund on expenses you paid for child care while you sought employment.
- Earned Income Tax Credit (EITC) – Also referred to sometimes as the EIC, this credit goes to taxpayers with dependents and grants higher amounts to filers with lower incomes and/or multiple dependents.
However, even if the custodial parent signs IRS Form 8332 or a similar document granting the non-custodial parent the rights to claim any or all of these tax credits, the non-custodial parent must still meet certain other qualifications regarding support and living situation to claim them.
Tax Deductions After Divorce
If you pay child support following divorce, any payments you make are, unfortunately, not deductible. Moreover, even if you pay child support, you still cannot claim those children as dependents on your taxes unless they also live with you for at least 50% of the year, or if the parent with whom they do live for at least half the year signs IRS Form 8332 or similar documents granting you that right.
Fortunately, if you receive child support payments after divorce, you do not have to claim them as taxable income.
Unless your divorce was executed before January 1, 2019, any alimony payments you’ve paid are non-deductible for tax purposes, and any alimony payments you’ve received do not qualify as a taxable income. However, if you make payments to an ex-spouse even though you have no legal obligation to do so, you may be required to pay a gift tax on those amounts.
Any legal fees you paid to execute your divorce are non-deductible for tax purposes. Likewise, you cannot deduct any expenses from your taxes that you paid for legal advice or counseling during the divorce process. The same applies to any legal costs you incurred to reach a financial or property settlement with your ex-spouse. However, such settlement could affect the cost-basis of such property, thereby affecting your taxes in that regard.
Where to Find Help With the Changes in Your Taxes After Divorce
The surest way to handle your taxes in divorce cleanly, fairly, and as stress-free as possible is with the impartial aid of a tax accountant well-versed in local, state and federal tax law, specifically regarding divorce. The best tax accountant in North Carolina to fit these qualifications is Scott Boyar, a CPA in Charlotte who’s helped many individuals and couples manage the changes in their taxes after their divorce.
If you don’t live in the Charlotte area, simply search for the best accountant near me for divorce. But if you do live in Charlotte or the surrounding parts of North Carolina, contact tax accountant Scott Boyar, CPA at 707-527-2725 or online at sboyarcpa.com/contactus.