If you’ve gotten a divorce since the last tax season, you may be wondering how filing taxes after divorce works. Changes in marital status impact how you file, your deductions, and even your liability for certain taxes, including the long-term capital gains tax. For couples filing taxes after divorce in Nebraska, understanding the nuances of filing taxes after divorce is important for financial stability and compliance with IRS rules. Here are five tips to help you through this process.
1. Know Your Filing Status
Your marital status as of December 31st determines your tax filing status for the year. If your divorce was finalized before this date, you can file as “single” or “head of household” as long as you meet the qualifications. Filing taxes after divorce as head of household offers better tax rates and higher standard deductions, but you must have:
- Paid more than half the cost of maintaining your home: This includes paying for rent or mortgage, property taxes, utilities like electricity and water, and groceries.
- Had a qualifying dependent living with you for more than half the year: A qualifying dependent could be your child or another eligible relative who relies on you for financial support.
Understanding these requirements for filing taxes after divorce will help you file correctly and maximize your benefits. If you’re unsure about your marital status or how to proceed with filing taxes after divorce, consult with a tax professional who can guide you through the process.
2. Understand Dependency Exemptions
Only one parent can claim a child as a dependent when filing taxes after divorce. This decision is often outlined in the divorce decree or custody agreement. Generally, the custodial parent has the right to claim the dependency exemption unless they choose to waive it by completing IRS Form 8332.
Claiming a dependent can unlock tax benefits, such as the Child Tax Credit, the Earned Income Tax Credit, and the Dependent Care Credit, each offering valuable financial relief for eligible parents.
It’s important to coordinate with your ex-spouse to avoid both parties attempting to claim the same dependent when filing taxes after divorce, as it could lead to IRS complications or audits.
3. Be Prepared for Long-Term Capital Gains Tax
Divorce often involves dividing assets like real estate, investments, and retirement accounts. Selling these assets may trigger long-term capital gains tax, which applies to profits from the sale of assets held for over a year. Here are some key considerations:
- If you sell the family home, you may qualify for an exclusion of up to $250,000 (or $500,000 for joint filers) on the gain if you meet the IRS ownership and use requirements.
- Transferring assets as part of a divorce settlement generally does not result in immediate tax consequences. However, when you eventually sell those assets, you may face long-term capital gains tax liability based on their increased value.
Collaborating with a financial advisor and a divorce attorney when filing taxes after divorce can help you avoid long-term capital gains tax and develop a tax-efficient strategy.
4. Alimony and Child Support Have Different Tax Implications
The 2017 Tax Cuts and Jobs Act changed the way alimony and child support are taxed. For divorce agreements finalized after December 31, 2018, alimony payments are no longer tax-deductible for the person paying them and are not considered taxable income for the person receiving them. On the other hand, child support payments remain neither tax-deductible for the payor nor taxable for the recipient. If you’re filing taxes after divorce, make sure you understand how these changes affect your return.
5. Divide Retirement Accounts Carefully
Transferring retirement accounts as part of a divorce settlement can be tax-efficient if handled properly. While there may not be immediate tax consequences when transferring accounts during the settlement, withdrawals from these accounts in the future could be subject to income tax or long-term capital gains tax, depending on the type of account.
To avoid long-term capital gains tax when filing taxes after divorce, keep detailed records of all account transfers and work with a financial advisor to ensure your long-term financial plan reflects these changes.
Take Control of Post-Divorce Tax Challenges
Filing taxes after divorce can be complicated, but with the right approach, you can avoid pitfalls like long-term capital gains tax and make the most of available benefits. Whether it’s understanding your filing status, managing dependency exemptions, or planning for the impact of capital gains taxes, staying proactive will make a difference.
At Nebraska Legal Group, our experienced divorce and family law attorneys are here to provide you with the guidance and support you need for filing taxes after divorce. Reach out to our team today to ensure your finances are on solid ground.