Common Changes to Filing Taxes Following a Divorce
Numerous issues related to your divorce can alter the amount of taxes you pay each year. There were 630,000 divorces in 2020, most of which resulted in both spouses needing to make changes to the way they file taxes. While alimony payments and child custody arrangements must be considered, some tax breaks might be available.
How Your Filing Status Changes
The marital status you have on December 31 determines what your tax filing status will be for that tax year. If the divorce hasn’t been finalized by the end of the year, a joint return can still be filed, saving you money when you file your return. You could also file with the “married but filing separately” status.
If you haven’t lived with your spouse for the final six months of the tax year, are filing separate returns, have paid over half of the home’s upkeep, and have had a dependent living in your home for over half of the year, you could file as head of the household, which allows for a larger standard deduction. In addition, after your divorce has been finalized, you could file as a single taxpayer or as head of household.
You might deduct your alimony payments if a divorce agreement was finalized before January 1, 2019. However, the spouse who receives these payments must include them as taxable income. As a result of the changes to the Internal Revenue Code contained in the Tax Cuts and Jobs Act of 2017, alimony can’t be deducted if the marriage was finalized on or after that date.
Child Tax Credits and Medical Expenses
The child tax credit can only be claimed by the custodial parent, the parent that the kids live with for most of the year. So when filing your 2022 taxes, the child tax credit amounts to $2,000 for every child who is 16 years old or younger.
If you have children older than 16, they may qualify for a dependent tax credit, which amounts to as much as $500 for every qualifying child. The noncustodial parent could claim this credit if the custodial parent doesn’t want to.
However, the custodial parent must sign a waiver stating they won’t claim the exemption. IRS Form 8332 is the one that the custodial parent must sign. It must also be submitted with the noncustodial parent’s tax return each year.
If you’re paying your child’s medical bills following a divorce, these costs can be included as medical expense deductions. This credit is available even when your ex-spouse has custody of your child. Medical expenses are considered deductible only if they exceed 7.5% of your adjusted gross income. Any other bills paid for the child can push costs over this threshold.
How Home Sales are Impacted
If you and your spouse have decided to sell your home, the date the sale takes place dictates what happens with your taxes. In most cases, the Internal Revenue Code allows individuals to avoid paying taxes on the initial $250,000 of profits following the sale of a home if the home has been owned and lived in for at least two out of the previous five years.
A married couple filing jointly can obtain an exclusion of as much as $500,000. In addition, a spouse can exclude $250,000 in gains on individual returns if the sale takes place after the divorce. However, if the two out of five-year test hasn’t been met, the exclusion is lowered and depends on how much time you spend at home.
If you have lived in the home for just one of the two previous years, $125,000 of gain can be excluded. If you’re about to seek a divorce and want to know how your tax situation will change, contact our New Jersey divorce lawyer.
Can You Deduct Your Legal Fees When Filing Taxes?
It’s usually impossible to deduct legal expenses after filing for a divorce. These expenses include everything from litigation to tax advice. Any payments could be subject to a gift tax if no legal responsibility has arisen due to the divorce settlement.
When you are considering filing for a divorce and want to make sure that you understand every facet of what this process entails, call our divorce lawyers today at (215) 886-1266 to schedule an appointment.