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If you’re going through a divorce, you should discuss how both parties will file their taxes to avoid unforeseen problems. Most attorneys are not allowed to give tax advice. So it is best to speak to a tax professional when divorcing because the way you filed in the past may not remain the same while going through a divorce. Here are some factors to consider before filing your taxes during and even after a divorce.
IRS Considerations
The IRS has a lot of helpful information when it comes to filing your taxes when you are separated or divorced, and we’ve summarized some of the main points below for your convenience.
Filing Status
Whether you are just separated or in the process of a divorce at the end of the tax year (December 31st), the IRS has one hard and fast rule regarding your filing status: A couple is considered married until they get a final divorce decree. This means that unless you have received a final divorce decree by the end of the tax year, you are still considered married by the IRS. Therefore, if you haven’t received that final dissolution order, you only have the option of filing as “married filing jointly” or “married filing separately.”
You are also considered unmarried at the end of the tax year if you get a decree of annulment during the year. If you do get the divorce decree before or on December 31st for a given tax year, then you are considered unmarried for the entire year and can use the filing status of “single” or “head of household”.
Dependents and the Tie Breaker Rule
Divorcing parents who file a joint return will naturally include any dependents. But if divorcing parents file separately, then they must decide who gets to claim their children as dependents because the IRS only allows one parent to claim each child. But if you have more than one child, the IRS allows you to split the children up between you. For instance, if you have two kids, mom can claim one child, and dad can claim the other. Just be sure that no child is claimed on both returns simultaneously.
If the parents can’t agree, the IRS has special tiebreaker rules. In most cases, a child spends more time with one parent than the other. Therefore, whoever housed the child more during the year gets to claim the child as a dependent. In the unlikely event that the child spent an exactly equal amount of time with each parent, then the parent with the higher adjusted gross income (AGI) gets to claim the child. However, this question of who claims the child on their tax returns is addressed and decided on a permanent basis in the final divorce decree.
Other Considerations
Home Sale
One of the things that often happens in a divorce is that the couple decides to sell their home. In this case, there may be capital gains tax implications. The law allows you to avoid taxes on the first $250,000 gain on the sale of your primary home, and couples filing jointly can exclude up to $500,000—as long as both used the home for at least two out of the last five years, and at least one spouse owns the home.
If you sell the house after the divorce is final, both you and your ex can each exclude $250,000 worth of capital gains on your individual returns. Even if you receive the house as part of the divorce settlement and sell it several years later, you are still entitled to the $250,000 exclusion.
Retirement Assets
You will need to be careful with your retirement savings when divorcing. For example, if you cash out your 401K to give divorce settlement money to your spouse, it is going to be considered a taxable distribution by the IRS. This means you’ll end up being stuck paying taxes on that amount and paying the penalty for early withdrawal.
A workaround for this issue is to give your spouse access to the funds under a Qualified Domestic Relations Order (QDRO). This relieves you of the tax burden while still transferring the funds to your spouse. But try to ensure this agreement is spelled out in your divorce order, so it is not treated as a taxable distribution to the IRA owner.
Same-Sex Marriage
Same-sex marriage became legal in the United States in 2015 with the historic Obergefell v. Hodges ruling by the US Supreme court. This ruling gave same-sex couples the right to marry, adopt children, and file taxes together, just like opposite-sex married couples. And just like any other marriage, same-sex couples can also divorce. When this happens, the same-sex couple needs to follow the same rules as opposite-sex couples and file as married (either jointly or separately) unless a judge issues a divorce decree before December 31st of a given tax year.
Domestic Partnerships
There are still a few states that allow both same-sex and opposite-sex couples to register as domestic partners. While this arrangement may allow these couples to gain certain rights in the eyes of that state, it does not change the couple’s status in the eyes of the IRS. Couples in an official domestic partnership are still required to each file taxes under the “single” status. Individuals in a domestic partnership can file as “head of household,” but only if the individuals have children and otherwise meet the IRS requirements for head of household. In this case, one but not both of the domestic partners can file as head of household.
Work It Out with Your Attorney
As you can see, there are many things to consider when getting a divorce. That is why you need an experienced family law attorney like those at the Jarbath Peña Law Group. We can help you work out all of the details that you might otherwise miss during marital settlement negotiations. Contact us today using our convenient online form, or call us at (305) 615-1005. We look forward to serving you!