According to a survey of 45 states and Washington D.C., there are roughly about 782,000 divorces every year.
If you are considering filing for divorce or in the process of a divorce, you may be wondering how does divorce affect taxes? What changes about your filing status? How do you sell your home quickly and efficiently after a divorce?
We have answered all your major questions regarding divorce and taxes. Here is the complete guide on everything you need to know about how divorce affects your taxes and your home.
How Does Divorce Affect Your Annual Tax Filing Status?
One of the most important things to understand about taxes after a divorce is that the timeline is what determines your tax filing status.
If you file for divorce in the summer for example, but the divorce is not finalized until the following calendar year, then you are still considered married for the entire year in which you filed.
If your divorce is finalized in December for example, then you will be considered unmarried for that entire calendar year.
You may be able to file as a “head of household” instead of filing as “single”. If you are a “head of household” then you are taxed at a lower tax rate for your income with a higher standard deduction.
To be eligible for this status you must pay over half the costs for a qualifying child or dependent and be unmarried. If your divorce is not final, then you must be separated for at least six months, as well as meet the other requirements.
How Does Divorce Affect Your Taxes?
You traditionally receive many tax breaks when you file as a married couple. However, once you are divorced, you become ineligible to receive those tax breaks.
There are certain things that may benefit you, such as filing as a “head of household” as mentioned earlier.
Without the added benefit of a joint income, your total income will decrease. This will most likely place you into a lower tax bracket.
Which Parent Can Claim the Children as Dependents After a Divorce?
There are many tax benefits to receive with claiming dependents. But after a divorce, who gets to reap these benefits?
Any children are filed on a single joint tax filing when you are married. When your divorce is finalized, only one parent is allowed to claim the child or children on their tax return.
Typically, the parent who gets to claim the child as a dependent is the one who is considered the residential or custodial parent. This is the parent with whom the child spends more than half the year.
It is critical to remember that a child cannot be claimed as a dependent on two separate tax returns. You will most certainly get in trouble with the IRS if you do this.
But just because you claim a child as a dependent on your tax return does not mean that the other parent can never claim the child on a future tax return. There are exceptions to this rule.
Parents can agree to switch years where they claim a child as a dependent. In these years, they must file as a head of household and make sure those requirements are met.
If both parents agree to this, they should use the IRS Form 8332 to file their dependency claim.
In this way, they can gain the tax benefits of claiming a dependent on their tax returns.
Can You Deduct Any Alimony Payments or Child Support?
Prior to 2018, payers of alimony could deduct the payments from their overall income. This enabled them to be taxed at a lower rate.
That changed in 2018 when a new tax law took effect. This new tax law called the Tax Cuts and Jobs Act (TCJA) made it so that individuals receiving alimony payments no longer have to pay any income tax on that alimony.
The person making the alimony payments can no longer deduct any alimony payments from their overall income. This benefits the one receiving the alimony.
The same thing rings true for child support. The individual making child support payments cannot deduct it from their income. The person receiving child support payments will not be taxed on it.
If you are the person making the child support payments and are also the custodial parent, then you can claim the child as a dependent on your tax return.
If you receive child support payments but the child does not stay with you for more than half the year then you cannot claim the child as a dependent.
Tax laws have a way of being revised, altered, or changed completely as the years go by. It is also important to check with a tax professional about what the latest tax laws are regarding child support and alimony payments.
How Do You Deduct Legal Fees After Filing Your Taxes After a Divorce?
Legal fees in any sort of divorce proceedings can get costly very quickly. You may be wondering if there is any way you could deduct these expensive legal fees from your annual tax filing.
As a general rule of thumb, you are not allowed to deduct any personal legal fees when you are filing your taxes. This means that you cannot deduct your legal fees related to your divorce come tax season.
This includes any personal advice you received from a lawyer about a divorce that cannot be deducted from your tax filings. The IRS can be extremely strict when it comes to legal fee deductions.
There are certain ways around this rule, however. If you can prove that your ex-spouse is purposely increasing the length of time of the divorce proceeding to raise your fees, you could potentially get them deducted. You would need to seek a judge’s approval.
Another way to be eligible to deduct legal fees associated with divorce is in the event there were any transfers of property.
It is recommended that you ask your divorce lawyer to break down what could be and could not be considered as tax deductions from the beginning. This will help keep your deductions organized when it comes time to file your taxes.
What Happens to Your Retirement Funds After a Divorce?
Retirement funds are very important investments that many people spend a lifetime building. Often times, these accounts, like 401(k)s and Individual Retirement Accounts (IRAs), are in one person’s name.
However, these retirement accounts are considered as marital property in any divorce proceeding. Barring any prenuptial agreements, you are entitled to up t half of any of these retirement accounts.
However, the taxes made on these retirement funds can also change dramatically after a divorce.
If you pull any funds out of a 401K before the age of 59 and a half, then you will have to pay a ten percent tax on any withdrawn funds. You can avoid this penalty by getting a Qualified Domestic Relations Order.
A Qualified Domestic Relations Order is an order given by a judge following a divorce proceeding if you choose to get one.
Another way to avoid any retirement fund related taxes following a divorce is simple. You can rollover any retirement funds to a new account through direct transfer.
If you do not roll over these funds in a direct transfer, you will be taxed at the ten percent rate because it will be considered a withdrawal.
How to Handle the Selling Your Home After a Divorce
A home is often one of the most valuable assets a couple filing for divorce has. It is common after a divorce to want to move out and sell the home you and your ex-spouse were sharing.
Wanting to downsize is a common reason. Going from a joint income to a single income can be the reason. Or, it might be required in the divorce proceedings to sell the house.
Some couples who end up divorcing own more than one home. The need to downsize is especially compelling if this is the case.
There are some helpful websites and platforms that can help you sell your home quickly following a divorce. They can give you an accurate home valuation estimate that can better prepare you to sell your home fast.
If you plan on selling your home after a divorce, faster is better. The quicker you complete the sale, the less you have to pay in listing fees and double the rent or mortgage payments.
What to Know About Paying Capital Gains Tax After Selling a Home During Divorce
Capital gains tax is the tax you must pay on income that comes from non-inventory assets. These assets are most commonly real estate and stocks.
When many people decide to sell their home, they can potentially be hit with a big tax bill on the sale of their home. If you are going through a divorce proceeding, it is right to be worried about this possibility.
However, you should know that there are ways to avoid paying the capital gains tax if you sell your house following a divorce.
You can receive a $250,000 exclusion when selling your home following a divorce. If you and your spouse sell the home together before the divorce is finalized, you can receive an exclusion of up to $500,000.
Because it is nearly double, there is a benefit to selling your home fast while the divorce proceedings are still going on.
Those who are selling their home and getting a divorce should definitely look into ways on how to sell a home fast so they do not miss out on this significant tax advantage.
if you purchase another home right away, some of that capital gains tax can be rolled over into the payment of another home.
When it comes to the overall process of selling and buying real estate during divorce, sometimes quicker really is better.
Seek Professional Advice on Taxes After Divorce
Ultimately, it is important to seek professional advice from either an accountant or divorce attorney regarding your taxes following a divorce.
There are so many nuances and caveats when it comes to filing status, capital gains tax, retirement funds, and more. A professional can help guide you in the right direction when it comes to taxes so that you come out in a sound financial position.
Consulting with a tax professional can also help you avoid any penalties or fees associated with filing incorrectly or falsely claiming a child as a dependent.
Another professional you should consult with is a home buying professional. These experts can help you sell your home within the time frame needed in order to capitalize on the capital gains tax benefit.
Learn More About How Divorce Affects Your Taxes Today
Taxes can be a difficult subject to navigate but can be especially tricky after a divorce. But how does divorce affect taxes that much really? As you have learned, there are so many things you have to be aware of when it comes to taxes after divorce.
It is especially to be mindful of taxes following a divorce to avoid any penalties or fines from the IRS.
If you or a friend have recently gone through a divorce and need more information about anything from tax filings to selling your home, we are here for you.
Create an account here at iBuyer for cash offers so you can sell your home fast following a divorce. We can help give you a home valuation and make it easy to get a cash offer for your home.