Divorce and Taxes: All You Need to Know

What should your filing status be?

Determining your filing status is the first step in filing your taxes after a divorce. Depending on the specifics of your situation, you could theoretically use any of the four options:

• Married filing jointly
• Married filing separately
• Head of household
• Single

To narrow down your choices, you need to answer the following questions: 

• Was your divorce or separation agreement in place by December 31st? 
• If you weren’t divorced or separated by the end of the year, are you and your ex willing to cooperate on financial matters?
• Did you and your ex live together during the last six months of the year?
• ‍Are you the custodial parent of any children? 

Your answers will help determine which status makes the most sense:

To summarize the chart above, here are the situations where you would select each filing status:

Filing jointly or single is relatively straightforward. Where most people get confused is filing separately from their spouse or filing as head of household. Let’s explore those two statuses in more depth: 

Married filing separately

This is the most common filing status for couples going through divorce.

Even when children and major assets aren’t in the mix, bad blood is difficult to avoid. Many people find filing separate returns to be the more comfortable option, especially when trying to maintain separate finances.

There are a few complications with this option, though.

Fewer available tax breaks

Many major tax credits and deductions are disallowed for married couples filing separately. To give a few examples, this filing status means you can no longer claim: 

• Earned income credit (EIC)
• Dependent care credit (for most filers)
• Tuition credits
• Student loan interest deduction
• Hope and Lifetime Learning Credits

If you lived with your ex at any point during the last six months of the year, these credits are off the table too:

• Child care credit
• Adoption credit
  

Issues with the standard deduction

In addition, married couples filing separately can only take a standard deduction of $12,550.

To complicate matters, they can’t itemize if their spouse takes the standard deduction, or vice versa. 

The thought process is that if you were living together for a portion of the year, some or all of your living expenses were shared, like your mortgage interest, property taxes, and charitable giving.

If one of you itemizes using 100% of your joint expenses, and the other takes the standard deduction, you would end up with a much larger deduction than you’re entitled to. To avoid gaming the system that way, the IRS requires that you use the same deduction type.

If you plan to itemize, any shared expenses will need to be split 50/50 with your ex. Alternatively, the higher earner can claim the itemized expenses, but that would mean the lower-earning  spouse gets little-to no deduction at all.

As you can imagine, most divorcing couples find it easier to just choose the standard deduction. Itemizing just isn’t worth the hassle of coordinating things even if that means missing out on some tax savings. 

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Head of household

The Head of household filing status is available to people with eligible dependents.

This is considered the second best filing status, behind married filing jointly. Here are some of the perks: 

• Standard deduction of $18,800: Nearly 50% higher than the deduction for single filers.
• Lower tax brackets: The 22% tax rate only applies to income over $54,200. Compare that to single filers, for whom it kicks in at $40,525. 
• Eligible for all credits and deductions

Like with all good things in the tax world, there are rules on who gets to claim this filing status. Let’s take a look at what those are:

Rule #1: You are divorced or lived separately for the last six months‍

Head of household can’t be claimed unless your divorce was final by December 31st, or you lived separately from your spouse for the last six months of the year.

Note that if you’re married but qualify for Head of household, this is the only filing status where you can choose a different deduction type — itemized or standard — from your spouse. 

Rule #2: You have eligible dependents

It goes without saying, but in order to claim “head of household” you have to actually have a household. That means you, plus at least one other person you’re responsible for.

As a general rule, there are two categories of people who count: children and eligible persons.

All of the following count as eligible children for tax purposes:

• Biological child
• Adopted child
• Stepchild
• Foster child
• Sibling (including step- and half-siblings)
• Descendant (meaning a child or grandchild of anyone on this list) 

These eligible children must either be younger than 19, or younger than 23 and full-time students.

Claiming an eligible child isn’t the only way to file as head of household. Any relative could qualify you for the status, including: 

• Parent or grandparent
• Niece or nephew
• Any relative connected by law

To qualify you for head of household status, though, you have to be the primary caretaker for your dependents.

Rule #3: You’re the primary caretaker

Here are the benchmarks for determining whether you count as the primary provider for your dependents:

• You didn’t live with your ex during the last six months of the year
• Your dependents lived with you for at least half the year
• You provided more than 50% of your dependents’ living expenses
• Any non-child dependents had less than $4,300 in earned income

Important note: Even if your ex pays child support or alimony, that won’t disqualify you from being the primary provider. But being able to demonstrate financial responsibility is key.

As long as you spend any child support on the children who live with you, you can still file as head of household. 

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Who gets to claim the dependents? 

A common issue during divorce is who gets to claim the dependents on their taxes. After all, child-related credits are some of the most lucrative.

In many cases, this issue is hashed out in the divorce agreement. Since it’s not uncommon for exes to fight dirty when it comes to taxes — more on this later — it’s practical to explicitly cover tax filing rights.

If the divorce agreement doesn’t stipulate anything, the default is that the custodial parent will claim any dependents. (The custodial parent is the one the dependent physically lives with during the year, or for the most days during the year.)

An important note: Even if the divorce agreement says which party gets to claim the children, that parent still has to meet the requirements listed by the IRS:

• Providing more than 50% of the child’s care
• Being the custodial parent

Tax law always supersedes divorce agreements. However, there is a workaround to the “custodial parent” requirement.

How to claim a dependent when you aren’t the custodial parent

Sometimes, the divorce agreement will stipulate that the noncustodial parent should claim the child. This is technically contrary to IRS rules, but there’s a workaround.

Enter Form 8332. This lets the custodial parent relinquish the dependent to the noncustodial parent. This form has to be signed by the custodial parent and attached to the noncustodial parent’s tax return. 

If you attach this form, you can claim your child even if you don’t meet all of the “primary caretaker” requirements listed above (like having them live with you for half the year).

Form 8332 has to be attached to the return every year you want to claim the child. Many co-parents opt to alternate who gets to claim their child each year, so this is a great way to keep both parties happy and encourage civil co-parenting. 

What to do if your spouse revenge-files 

We all know about revenge-cheating, but have you heard of revenge-tax filing? Believe me, it's a thing.

Hard to imagine something as innocuous as a tax return being used for revenge, but tax credits are real money. The child tax credit alone can be as much as $3,600 per child.

If your ex rushes to file their return and claims your child as a dependent before you get the chance, your own return will likely be rejected. The IRS will flag the duplicate Social Security number in the system and know there’s funny business afoot. 

If this happens to you, it’s possible to fix the issue, but the process isn’t pleasant.

Before doing anything else, you’ll probably want to file an extension for your return. This is going to take a while to fix, so buying yourself some extra time is a good idea.

In most cases, you have two options:

Option #1: Get your ex to amend
Your first option is to see if your ex will amend their return and remove the dependents.

It’s unlikely, but if your divorce decree stipulates your right to claim the child, you can always appeal to the court.

‍Option #2: Prove you’re the custodial parent
Your second option is to submit Form 886-DEP-H with supporting documentation proving you were the one legally entitled to claim the dependents.

Supporting documentation could include any of the following: 

• Divorce decree 
• Birth certificate
• Adoption papers
• ​​Documents from the child’s school or daycare (to prove the child’s home address)
• Medical records for the child

In either case, expect six to eight weeks for the IRS to review the new documentation and process the changes — possibly even longer. 

Do you need to report alimony or child support on your taxes? 

This is a very common question. The rules regarding these types of payments changed in 2018, after the Tax Cuts and Jobs Act was passed.  Understandably, this created a lot of confusion.

Let’s look at each type individually: 

Child support

When to report it: Never! It’s not required

Child support payments are never considered taxable income for the recipient. If you get any from your ex, you don’t need to report it on your tax return. 

If you’re the one paying child support, you can’t claim it as a deduction. That means you don’t need to list it on your return either. 

Bottom line: Child support is never considered a taxable exchange. That’s because it’s generally thought of as a reimbursement for joint child care expenses.

Alimony payments

When to report it: If your divorce was finalized before 2019.

Prior to 2018, alimony payments were taxable for the person receiving them and deductible for  the person paying them.

For divorces that took place after 2019, this is no longer the case. If that applies to you, neither you nor your ex needs to report any of these payments on your taxes.

For divorce agreements prior to 2019, the old treatment still applies. You’ll be taxed on it if you’re receiving alimony, and you can deduct it if you’re paying alimony. That means you’ll have to report it on your taxes either way.

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What if you changed your name when you got married? 

This is one of those traditions that, as an accountant, I hope we start phasing out. It adds an unnecessary layer of complexity when it comes to filing your taxes. 

That’s because, legally speaking, marriages and divorces are done at the state level. The federal government has no clue that either life event has happened — unless you tell them.

Submitting your name change to the SSA when you get married

Even if you change your name after marriage, you’ll still have to file your taxes under your original name by default.

If you want to file your taxes under your new married name, you’ll have to submit your marriage certificate to the Social Security Administration and get a new Social Security card.

The IRS crosschecks the filings it receives with the Social Security Administration’s database, to verify things like names and dates of birth. So it’ll pick up your married name there.

Submitting your divorce decree to the SSA

Now, after all that paperwork, your marriage comes to an end. If you don’t want to be stuck filing your taxes under your ex’s last name, you have to go through that whole process all over again. This time, instead of a marriage certificate, you’ll have to show the SSA your divorce decree. 

What if you shared a home with your ex? 

Splitting assets during a divorce is complicated. Even more so with large assets like a house. 

If you and your ex bought a home together — or live in a community property state —  and it was your primary residence for two of the last five years, you can each exclude $250,000 of the taxable gain from your income.

But what if one of you doesn’t want to sell the home? What are your options? 

Option #1: A divorce buyout

If one of you wants to keep the house and the other wants to sell, the spouse looking to keep the home can buy it out. This wouldn’t trigger any capital gains — when assets are exchanged during a divorce, those are generally considered tax-free transfers.

The person who keeps the house will still be entitled to exclude $250,000 of the taxable gain when they eventually sell. 

Option #2: Co-owning the home

In some cases, one spouse will remain in the home, and the other will move out — but keep their ownership in the home. In that case, the spouse that moved out risks losing their capital gain exclusion since it’s no longer their primary residence.

There’s one way to avoid that outcome: clearly stating the living arrangement and co-ownership details in the divorce agreement.

This protects the spouse who moved from losing their capital gain exclusion. If it’s clear that the change in residency was due to the divorce settlement, the moving spouse retains their right to the capital gain exclusion.

What if you ran a business with your ex? 

Joint ventures between married couples are extremely common. Tax-wise, these sorts of businesses are basically like sole proprietorships, instead of more complicated structures, like partnerships or corporations. Or, as the IRS puts it, they're "treated as sole proprietors for Federal tax purposes."

The main difference: Instead of being owned by a single person, "qualified joint ventures" are owned by a married couple who file a joint tax return.

All in all, joint ventures are the easiest way to two people to go into business together — they just have to be married filing jointly. But what happens to the business if the two owners get divorced?

Generally speaking, there are two options:

Option #1: Close up shop

Most of the time, an irreconcilable romantic difference means the end of the business.

If your joint venture has any major assets, it’s probably worthwhile to include the liquidation process in your divorce agreement. These assets can either be split 50/50, or one spouse can buy the other spouse out.

Either way, you and your ex will need to file each file a separate, final Schedule C for your joint venture. Split the revenue and expenses 50/50 between the two Schedule Cs.

If you need help tracking your business expenses, look no further than the Keeper app! Designed to scan your bank statements for every eligible write-off, our expense summary report will make dividing your Schedule Cs easy. (Something about your divorce ought to be, right?)  

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Option #2: File as a partnership

Once the marriage ends, you can no longer treat your business as a joint venture.

If you want to stay in business, you'll have to be treated as a partnership for tax purposes. That means you’ll need to file a separate business return using Form 1065 (instead of simply filing your Schedule Cs.)

Any carryover losses you had from the joint venture can still be used. Just apply it against your  partnership income going forwards.

Like with all aspects of a divorce, surviving the difficult periods requires support from the right people. Keeper is here to help you get through it. Our team of tax assistants can help you navigate these tough questions, so that you don’t have to do it on your own.

Filing taxes after a divorce is arguably the third most stressful life event a person will go through, but armed with the right tools, it can be done!