For many people, getting divorced is a difficult and life-changing experience. While there are undoubtedly challenges that come with divorce, it’s important to consider that there may also be some potential tax breaks available as both partners go through this process.
Determine your tax filing status
If you were legally married as of December 31, you can file a joint tax return. This allows you to combine your income with your spouse to receive a higher standard deduction.
If you can’t file jointly, you can still consider filing as head of household, which also has the benefit of a bigger standard deduction and more lenient tax brackets. However, only one spouse can file as head of household, and there are several requirements to be eligible: you must have had a dependent living with you for at least half the year, and you must have paid for more than half of the upkeep of your home.
Alimony and Child Support
If you have an alimony agreement put in place before 2018, you can deduct the payments as an above-the-line deduction. However, if you began an agreement after 2018 or changed an existing agreement, the payments will not be considered deductible. The IRS also requires the recipient’s social security number to be reported, so they can track it to make sure it’s reported as received income.
Child support payments are handled in a separate manner. You cannot deduct nor be taxed for any child support payments made or received.
After a divorce is finalized, only the custodial parent can claim children as dependents. The custodial parent is the parent with whom the children live with more nights during the year. This parent can claim the earned income tax credit and other credits such as higher education tax credits.
There is an exception to this – a custodial parent can fill out a Form 8332 waiver and transfer dependent status to the non-custodial parent on a yearly basis. This could make sense in a situation where the non-custodial spouse falls in a higher tax bracket.
Children’s Medical Expenses
If you contribute towards a child’s medical bills, you may also be eligible to include this in your medical expense deductions. This applies even if you aren’t the primary custody holder. However, the expenses would need to exceed 7.5% of your adjusted gross income to be eligible.
Asset Transfers and Sales
It’s important to consider the possible tax implications involved with transfers of assets. While there is no tax responsibility for the recipient when a property is transferred during a divorce, they would be responsible for capital gains taxes on the appreciation of the house if and when it was sold.
You may also decide jointly to sell a home. In this situation, if you have owned the property and lived there for at least two out of the previous five years, both spouses can exclude up to $250K each if filing separately, or $500K if filing jointly.
If you live in the San Jose, CA area and have questions about the tax implications of a pending divorce, call (408) 553-0801 or click here to schedule a complimentary consultation. Lonich Patton Ehrlich Policastri has a team of experienced attorneys specializing in divorce and family law who are ready to help you.