When you get married, you take new rights and responsibilities toward your spouse. One of the most substantial changes is how you file taxes. For most couples, filing taxes jointly can offer significant benefits.
That’s why taxes are a substantial concern when you file for divorce. Depending on your circumstances, your split could impact your tax burden to the tune of thousands of dollars. As you proceed through your divorce, remember how the following four considerations could affect your IRS bill in April.
1. Filing Status
When you’re married, you have two options for filing your taxes. You can choose “married – filing jointly” or “married – filing separately.” As long as you remain married, filing jointly is typically the better option because many couples fall into a lower tax bracket together than they would independently.
However, once you file for divorce, things change. If your split extends until January 1, you will still be considered married for tax purposes for the previous year. You’ll need to decide whether to file jointly or separately.
Some couples file separately at that point because they do not want to be liable for each other’s tax burdens or mistakes. When you file jointly, you’re both independently responsible for the full tax bill and any errors or fraud either spouse commits. However, if you file separately, you are not responsible for your spouse’s statements or mistakes.
That’s not the only way divorcing can affect your filing status. If you’re legally unmarried, you may be eligible to file as “single” or as “head of household” (HOH). If you have no dependents, single is your only option. However, suppose you’re paying for more than half the expenses of a “qualifying person,” such as a child, grandchild, or other relative you can claim as a dependent. In that case, you may qualify as for head of household status. That grants you a better standard deduction, wider tax brackets, and access to other write-offs not available to people filing as single.
A skilled divorce attorney can explain how your filing status may be affected by your specific circumstances. They can also help you achieve a settlement, allowing you to file according to the most beneficial.
2. Tax Withholdings
If you receive a W2, you likely filed a W4 informational form with your employer when you were hired. This form provides the company with details about your tax filing status so it can withhold the correct amount from your paycheck for income and employment taxes.
Since your tax filing status changes when your divorce is finalized, your W4 must also change. Once you receive notice that you are officially divorced, you have ten days to file an updated W4 with your employer updating your filing status. Failing to do so may result in incorrect withholdings and penalties at tax time.
3. Claiming Dependents
Claiming a dependent is one of the best ways to access multiple substantial write-offs and credits on your taxes. If you are entitled to claim a child as a dependent, you may be eligible for the following:
- Child Tax Credit (CTC): You receive a flat $2,000 credit for each child you claim as a dependent who is 17 or younger on December 31 for that year as long as your modified adjusted gross income is under $200,000.
- Higher Earned Income Tax Credit (EITC): While everyone has access to the EITC, having just one dependent when filing as single or HOH nearly triples the eligibility ceiling and increases the maximum credit from $600 to $3,995 for 2023. More dependents increase it even further.
- Child and Dependent Tax Credit (CDTC): If you’re paying for the care of a child or dependent while working or searching for work, you can receive a credit for up to $1,050.
- American Opportunity Tax Credit (AOTC): If you’re paying for a dependent’s college education, you can receive up to $2,500 per year in credits.
- Student Loan Interest Deductions: You can deduct up to $2,500 of student loan interest you pay on behalf of a dependent.
In addition, you may be eligible to deduct the cost of medical expenses for your child even if you cannot claim them as a dependent. You can deduct the amount you spend on their medical care that exceeds 7.5% of your adjusted gross income.
However, there have been some changes to other ways that taxes relating to minors are handled under federal law. Since 2018, child support is no longer tax-deductible for paying parents. Meanwhile, parents who receive support do not have to report it as income.
4. Property Gains
Conveniently, property transferred due to a divorce is not subject to capital gains or other transfer taxes. However, selling this property can have substantial tax impacts after your split. For example, couples benefit from a $500,000 capital gains exemption on the sale of their primary residence. However, individuals only receive a $250,000 exemption. Selling a high-value house after you’ve split could expose you to significantly higher taxes for the year.
Let Regele Law, LLC, Help You
The tax implications of divorce can be much more complicated than you’d expect. If you’re preparing to end your marriage, you should consider more than the cash value of assets and support. It’s crucial to consider how different issues will affect your tax bill, too. At Regele Law, LLC, our skilled attorneys can help. We have years of experience helping our clients achieve better divorce settlements that account for common financial concerns. Schedule your consultation with our Salem, Oregon, divorce law firm today to learn more about how we can help you avoid unnecessary tax burdens.