Tax season has officially begun, which means many of us are gathering up all the paperwork accumulated in various places throughout our house.
But if you are in the middle of a divorce or even considering it, it’s important to start planning now for next year’s tax season.
Credits and deductions
One important thing to understand is that your filing status will change. Your marital status on December 31 will determine how you will file. Your two likely options will be either:
- Single if you don’t have any dependents
- Head of household if you have primary custody of a dependent child or pay at least half the costs of your dependent child’s home.
Alimony and child support payments can’t be deducted, nor can they be reported as taxable income. In addition, the IRS only allows one parent to claim tax benefits, such as the Child Tax Credit or the Earned Income Tax Credit. The credits typically go to the parent with primary physical custody unless they sign a waiver allowing the non-custodial parent to take the credits. If parents share equal custody, it’s important to document which parent will claim the credits.
Additionally, if children are involved, there are other tax deductions and credits to discuss, such as:
- Childcare tax credit for daycare or after-school care
- Medical expense deductions for out-of-pocket payments for your child’s medical costs
- Tax deductions and credits related to your child’s education
Dividing the marital property may also have potential tax implications. If you decide to sell the family home and split the proceeds, the capital tax gains may apply. In addition, transferring funds from a retirement account could impact your taxable income and incur a 10% penalty unless there is a qualified domestic relations order (QDRO).
Post-divorce taxes can be complicated, and you must begin planning early to understand your tax obligations and minimize your liability.