Going through the process of divorce or separation is a trying time for any couple. Between dividing up property, legal proceedings and handling child custody, many people can forget the tax implications as well. You can avoid missteps with the IRS —especially if there's a breakdown in communication between spouses — by keeping in mind a few tax tips.
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Choose the right filing status
You may consider your marriage over the minute your spouse moves out of the house, but in most circumstances, the IRS continues to treat you as a married person as long as you are still legally married on the last day of the tax year for which the return is due. Usually, unless you have a final divorce decree in hand, you can't file as unmarried or head of household, even if your spouse doesn't live with you.
In most circumstances, you have only two options while divorce or separation proceedings are pending:
- File as a married person jointly with your spouse.
- File as a married person separately.
In some cases, spousal communication has broken down so you have no choice but to file a separate tax return. Or, you may suspect your spouse of underreporting income to the IRS to avoid revealing the true income in the divorce action.
Usually, signing a joint return makes both spouses liable for the underreporting of taxes and penalties, so you may choose to file separately to avoid this potential problem.
Married couples filing separately often lose access to key credits and deductions that lower tax liability, including:
- Educational deductions and credits
- Student loan interest deduction
- Child and Dependent Care Credit
- Earned Income Credit
File under your married name
Although you may be itching to ditch your married name or to remove that hyphen, doing so on your tax return before your name is legally changed may delay your tax refund.
The IRS checks your name against your record at the Social Security Administration (SSA). If your tax return is due and your name has not been legally changed, file under your married name until your name change is official.
Once you are ready to change your name, notify the SSA of your name change, if any. Then, you can use your new name to file tax returns.
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Decide who claims the children
If you decide to file a separate return, try to decide up front with your spouse who claims your children on their tax return. A parent with sole physical custody is typically entitled to claim the child.
But, if your spouse hasn't moved out of the house yet, some confusion may arise regarding who is entitled to claim the child. It can become even more confusing with joint custody arrangements. It’s best to agree who will claim the child or children ahead of time.
You may also agree to assign the child's dependent status to the "non-custodial" parent who doesn't have custody using IRS Form 8332 for a variety of reasons, including if the tax benefits are better because your spouse has a higher income.
Claiming a child as a dependent on more than one tax return typically flags the returns in the IRS database and will often trigger an audit of both parents' returns.
Don't classify interim support as alimony
Although you may have moved out of the family home or filed for divorce, any payments you made to support your spouse before the divorce is final are not considered alimony by the IRS unless they are pursuant to a court order and specified as alimony.
Alimony payments are typically tax deductible by the person making the payments, and you may feel entitled to some tax benefit as a result of supporting your estranged spouse. However, the IRS only allows the deduction if support payments were outlined in a written separation or divorce agreement.
For divorce agreements entered into after 2018, alimony will no longer be deductible to the person paying it and will not be taxable to the person receiving it.