Couples navigating the complexities of a divorce may often overlook the aftermath of their separation and its effect on their taxes. With President Trump’s 2017 Tax Cuts and Jobs Act (TCJA), which also affects the divorce process, it’s important to re-examine how divorce will affect your taxes.
Under this law, which came into effect last year, the higher-earning spouse will no longer get a tax benefit from payment deductions from his or her income, and the lower-earning ex is no longer required to cover taxes for alimony that he or she receives. Analyst Dan Caplinger says that the new law helps the lower-earning ex-spouse, while others claim that alimony recipients are actually getting the short end of the stick.
Whichever the case may be, there are some things that haven’t changed and must be taken into consideration when you are thinking about or are in the process of getting a divorce.
• Filing Status: The last day of the year will determine your filing status. If you are unmarried or legally separated on the last day of your tax year, you are considered unmarried for the whole year. You can file as either single or claim Head of Household status.
• Head of Household: You can take a higher deduction if you are single on the last day of the year, compared to filing as a Head of Household. However, it can be beneficial to claim Head of Household status if you have a dependent and provide more than 50% towards child support for them. Based on the new law, the deduction for single filing status is at $12,000, compared to $18,000 for Head of Household.
• Child and Dependent Care Credit: If you have custody of children under the age of 13, you can claim up to $1,050 in credit for one child, and $2,100 for two or more children.
• Home Mortgage: Deductions for home mortgage interest will be decided by a settlement agreement or by the terms of judgment after the divorce. If you and your ex are practicing joint ownership, as tenants or otherwise, you can both split tax deductions 50/50 for mortgage interest and real estate taxes. On the other hand, if the interest from the marital home is given to one person as agreed upon in a settlement, that party is the only one allowed to take the mortgage interest deduction.
•Medical Expenses: Likewise, tax deductions from medical expenses can be split in half if the expenses were paid from a joint account. Only medical services received while you were married can be itemized. Each party can also claim whichever services and expenses he/she personally incurred, as well as for any dependents they may have.
Given all the variables that need to be considered, it can be a little intimidating to learn about the impact and intricacies of a divorce not only on your taxes, but in your life in general. If you’re just beginning the process or considering it, you may find it useful to read our guide to ‘Choosing the Best Type of Divorce for Your Family’. It will also be beneficial to spend some money on a good tax attorney who can guide you and deal with your tax situation during your divorce. In their review of the roles of tax attorneys today, Special Counsel highlights how these professionals must have a thorough understanding of tax laws so they can help you find opportunities for tax advantages and work towards your best interests. This is especially important given the passage of the TCJA, which brought about the biggest change in American tax laws for the past three decades. A good tax lawyer will be knowledgeable about the implications of this law and can advise you on its practical impact on your own divorce. Taking the time to work with your tax attorney to come up with what’s best for you can make the process easier and more beneficial for you, and even your ex-spouse, in the long run.
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