What To Know About Filing Taxes If You Got Divorced In 2022
Divorce changes a lot about your life — including how you file your taxes. Here’s what you need to know to make the process as smooth as possible.
Whether a surprise or a long time coming, the dissolution of marriage changes every aspect of your life — including how you file your taxes. If you got divorced in 2022, everything from your filing status (you filled out a new W-4, right?) to how you claim dependents needs to be adjusted. What’s more, you’ll have things like child support, alimony payments, and division of assets to account for as well.
In short, when you’re filing taxes after divorce, there are a lot of factors to consider and a lot of questions to ask (Are you filing as single or head of household? Can you take advantage of the Child Tax Credit?) So, to help keep you on track this tax season and prepare you for all the ways your situation has changed, here are some main points to know.
1. Adjusting Your Filing Status
In the event of a divorce, the first and arguably most obvious change is your filing status. The IRS provides four different filing statuses: Married Filing Jointly, Married Filing Separately, Head of Household, and Single. Married tax filers can choose any of them except for single.
After your divorce is finalized, your options are limited to Head of Household filing and Single filing. If you are legally separated but not yet divorced, you may be able to choose Married Filing Separately. Paul Miller, Managing Partner and CPA at Miller & Co, LLP in New York City, emphasizes understanding your choices, as the “change can affect a person's standard deduction, tax rates, and eligibility for certain credits and deductions.”
Unmarried taxpayers may file as Single whether or not they have dependents. Generally, the non-custodial parent of a child of divorce will file as Single unless there are children from another marriage living in their home more than part-time.
Single filing status provides the lowest standard deduction and narrowest tax brackets of any of the available filing statuses resulting in a higher taxable income and fewer opportunities for credits and deductions. If you’re divorced and did not maintain children for the majority of the year, you are required to file as Single.
- Head of Household
Head of Household filing status is reserved for single taxpayers who have at least one dependent and pay for at least half of maintenance costs for the dependent’s home. Typically this is the parent with majority custody of any children of the marriage. To qualify for head of household filing, you must be legally single or, in the case of separated couples, living separately for at least six months.
“This status typically results in a lower overall tax bill than filing as a single taxpayer, as it provides a larger standard deduction and lower tax rates,” says Miller.
- Married Filing Separately
To use the Married Filing Separately status, you must still be legally married and have not obtained a Decree of Divorce of Order of Separate Maintenance by December 31. Estranged couples and couples who have lived separately for at least half the year but without a legal separation order can use the Married Filing Separately status.
Each spouse files their own return, reporting only their income and claiming their own credits and deductions. They are solely responsible for their tax liability and the sole owner of any refunds.
Tax brackets for those who choose Married Filing Separately are narrower than those for Head of Household, resulting in a higher taxable income. Also, if you use the Married Filing Separately status, you lose out on the total value of credits and deductions like student loan interest deductions and the Child and Dependent Care Credit, and can only claim half of the standard deduction, Child Tax Credit, and deductions for retirement savings account contributions.
There are only a few situations where it would be beneficial to use the Married Filing Separately status, so be sure to check with a tax pro before you choose this status.The IRS provides a useful tool to help you determine the correct filing status for your situation.
2. Claiming Dependents
Determining which spouse claims any dependent children is the next important step in clarifying your tax situation after a divorce.
The IRS does not recognize joint custody arrangements and bases custodial parent standing on the parent who had the child for the majority of the year. If the child slept in the father’s home for 183 nights of the year and the mother’s home for 182 nights of the year, the father is, for tax purposes, considered the custodial parent.
If there are multiple children, each parent can claim Head of Household if they can provide documentation that each child spent the majority of the year with one parent or the other and that parent provided the majority of the financial support.
Only the custodial parent is entitled to claim dependent-based credits and deductions. Record keeping regarding visitation is crucial as the IRS is very picky when it comes to who claims dependents. Here are a few points to keep in mind.
- A child cannot be claimed as a dependent by two different people unless those people are married and filing a joint tax return. So, if both you and your ex-spouse claim the same child as a dependent, the return that was received second will be returned.
- If you pay medical expenses for your child, those expenses may be deductible even if you are not considered the custodial parent.
- If you and your spouse cannot agree on who the custodial parent is, the IRS has a tiebreaker rule that allows the parent with the highest adjusted gross income to claim the child and qualify for dependent-based credits and deductions.
3. Making Deductions
Claiming a dependent opens up several valuable credits and deductions available to the custodial parent.
- Child Tax Credit
The CTC is a credit of up to $2,000 per qualifying child. “To qualify, the child must be a U.S. citizen, national, or resident alien, and must be your dependent,” said Miller. “The credit begins to phase out for taxpayers with higher incomes.”
- Earned Income Credit (EIC)
The EIC is a tax credit for low- to moderate-income taxpayers with children. “Generally, the parent with whom the child lived for the greater part of the year is entitled to claim the EIC,” said Miller. “However, if the child lived with each parent for an equal number of days during the year, the tiebreaker rules apply. Under these rules, the parent with the higher adjusted gross income (AGI) is entitled to claim the credit.”
- Child and Dependent Tax Credit
The CDCC provides the taxpayer a credit for a percentage of child care expenses incurred while working or looking for work. “Generally, the parent who claims the child as a dependent is entitled to claim the credit,” said Miller. “However, if the child spends equal time with each parent, the parent with the higher AGI [tiebreaker rule] is entitled to claim the credit.”
4. Figuring Out Financial Support Payments
The IRS treats child support payments and alimony payments differently when it comes to taxes, so it’s important to keep detailed records of amounts paid and received in each category.
- Child Support
Child support payments made from the non-custodial parent to the custodial parent are not tax deductible, and payments received by the custodial parent from the non-custodial parent are not taxed. Received child support payments should not be added to your annual income when determining your adjusted gross income.
Child support payments are tax-neutral and are considered, for the payer, as a living expense. The non-custodial parent can deduct some dependent medical expenses, but these are itemized deductions and are considered separate from child support payments.
Alimony payments used to be tax-deductible for the payer and did not need to be reported by the recipient. Since tax year 2019, this is no longer the case.
For divorces finalized during or after tax year 2019, alimony is not tax deductible by the payer, and the recipient is not required to pay taxes on any alimony or spousal support payments received.
This is not the case for divorces finalized before 2019 — payments are tax deductible by the payer, and the recipient must report payments as taxable income.
If you are required to report alimony (your divorce was finalized before 2019), do so in the appropriate field in your tax prep software. If there is no field for alimony, enter it as other income.
5. Dividing Property & Assets
Marital property is generally divided or transferred between spouses before a divorce is finalized and is laid out in the divorce agreement. Homes and other assets may change names or be sold, and the proceeds divided or kept by one spouse. Reporting these proceeds is necessary in some cases, but not all.
“The transfer of property between spouses as part of a divorce settlement is generally not taxable,” said Miller. “However, if the transfer involves appreciated property, such as stocks or real estate, the receiving spouse may owe capital gains tax if they sell the property.”
If, as part of the official divorce agreement, you and your spouse decide to sell your primary residence, you may have to pay capital gains tax on the proceeds of the sale. Current tax law allows you and your ex to exclude up to $250,000 in gain before proceeds are taxed.
Division of retirement savings also comes into play when you file taxes after a divorce. Simply cashing out a 401(k) or IRA to split funds with your spouse is a bad idea. The IRS sees that as a withdrawal, and those funds are subject to capital gains tax.
The IRS provides a workaround called the Qualified Domestic Relations Order, which allows the receiving spouse access to retirement funds without the paying spouse being stuck with a tax bill on the transfer.
When you file your taxes, taxable proceeds from the division of property should be reported as “other income” if a specific field is not provided in your tax prep software.
So, there you have it. Divorce means significant change in a lot of important areas, taxes included. Educating yourself on how ending a marriage affects your tax situation is key to avoiding an unpleasant surprise when tax time rolls around.
It’s also important to keep detailed and accurate records of all visitation, dependent medical expense payments, and asset division throughout the year, as it will help ensure you don’t leave any money on the table or in the hands of the IRS and that you aren’t surprised by a huge tax liability when you file. Good luck.