Let’s be honest… unless you love numbers or specialize in accounting, taxes are intimidating and confusing. Even then, one misstep can lead to thousands of dollars owed in state or federal taxes. Having confinance (confidence+ finances) doesn’t mean knowing everything. It means being confident in your finances, and also knowing when to ask for help. Taxes are one of those times, ladies!
One mistake that so many make during their divorce process is to rely solely on their attorney/legal advisor or on their own Google searches (gasp!) to understand every impact of their divorce. It’s important that you truly understand the implications your divorce has on each aspect of your financial picture, including your taxes. Here we discuss the top 3 tips for taxes, before, during, and after your divorce.
1) Filing Status and Divorce Timeline
The finalization of your divorce has an impact on your tax filing status for the year. The first misconception is what filing during the divorce process effects your taxes. The initial filing or service for divorce typically does not have an impact on your tax filing status. Instead, the finalized Decree, or documentation signed by a Judge and filed as a court order indicating the termination of a marriage, is the document that changes your tax filing status.
A tax filing status is the category under which you begin your tax filing, such as “Married” or “Single”. Choosing the correct status is important as it determines your filing requirements, as well as your eligibility for credits and deductions. It is always recommended to seek out tax advice to determine the status that applies to your specific situation.
Your tax filing status is based on the last day of each year, December 31. Your marital status on this day designates your tax status for the entire previous year. For example, if you are married on December 31, 2019 and have not yet finalized your divorce, you typically have the option to file “Married, Filing Jointly” or “Married, Filing Separately” for 2019. If your divorce is finalized on December 31, 2019 or any day before, you typically must file your taxes "Single" for all of 2019, unless you qualify for "Head of Household".
But, why is this important? Well, each tax status has different implications and benefits. If you are imagining tax statuses in a diagram from most beneficial to least beneficial, for most individuals the following would apply:
Thus when you file your taxes, the status you choose could mean the difference between saving thousands of dollars or paying thousands of dollars in taxes.
Before the finalization of your divorce, talk with a tax advisor to determine the best filing status for you, as well as to understand the best timeline for the finalization of your divorce. If it would be jointly beneficial for you and your spouse to file your taxes together for your last year of marriage, you may be able to ask the professional assisting with your divorce (i.e. legal advisor or mediator) to delay the finalization of the divorce until after December 31 of that year.
For example, Susan and George are near the end of their divorce process in September 2020. They speak with their individual tax advisors and are told filing “Married, Filing Jointly” would be the most beneficial option for their 2020 taxes, saving them thousands of dollars over each filing “Single”. Susan and George ask their divorce professionals to delay the finalization of their divorce until after December 31, 2020 to guarantee they can file jointly for their 2020 taxes.
2) Head of Household
Once your divorce is finalized, you typically have the filing status options of “Single” or “Head of Household”, if you meet certain requirements. This distinction is important, as demonstrated above. “Head of Household” traditionally will provide you with more tax benefits than “Single”. Ask your tax advisor if you may apply for “Head of Household” and how it may benefit you specifically compared to filing your taxes “Single”.
In order to qualify for “Head of Household” status, you must typically meet the following requirements:
Paid more than 50% of the cost for maintaining a home
Traditionally have a qualifying person who lived within the home for over 50% of the year
“Head of Household” will most often apply if you have a dependent child within your care for at least 50.1% of the time each year. If you are the custodial parent (have the majority of parenting time) of your minor children each year, you may qualify for “Head of Household”.
But what if you have equal parenting time (you and your former spouse have the children an equal amount of time each year)? You may consider asking your divorce professional to add a clause to your Decree designated when you and your former spouse may claim “Head of Household”. For example, “Although parenting time is equal, the custody arrangement shall be structured as follows: Father has physical custody of Sam (minor child), at least 50.1 percent of the time, and Mother has physical custody of Andy (minor child) at least 50.1 percent of the time.” If your divorce has already been finalized, speak with your tax advisor regarding what documentation may be necessary to show that you qualify for “Head of Household”.
3) Use a Tax Advisor
Whether you have always been the person in your household who filed the taxes, or your spouse always completed them for you both, it is important that you seek out tax advice. This is especially important in the year your divorce is finalized and the year that follows. During a divorce, you are not only changing your filing status, but also experiencing a division of your assets and the potential addition of support. Each element has different tax implications, and accounting for them incorrectly can have devastating impacts on your taxes. A tax advisor is trained to help you understand the tax implications of your divorce and maximize your tax benefits at the end of each year. Even if you choose to use an online program, such as Turbo Tax, opting for their Live version in which a CPA assists you through any questions can be worth the extra expense.