If you were legally separated or divorced since the last time you filed your taxes, your return this year can look a lot different than it did before. Millions of Americans rely on TurboTax to help them complete their tax returns, and there are important things recent divorcees should know before they file again.
Read on to discover some helpful tips that can help recent divorcees accurately fill out their tax returns.
Pay Attention to Your Filing Status
The first thing you should check this year is your filing status. If you and your ex-spouse were filing jointly during your marriage, you can change your status to head of household (for a larger standard deduction and better tax brackets) if a dependent lived with you for more than half of the year and you paid for more than half of your home's costs.
If you were still married by Dec. 31 – that is, divorce proceedings did not conclude until after New Year's Day – you can still file a joint tax return with your ex-spouse or the two of you can file separate returns using the married status.
If none of the above apply, you should file using the single status.
Your Spousal Support Payments
If you must provide your ex-spouse with spousal support payments, you can claim a tax deduction for them if your divorce was finalized before 2021. The IRS will only consider spousal support payments that are made in cash and required by the divorce agreement – outside of these parameters, and you risk an audit. If you are receiving spousal support, you must report this income on your tax return and pay income tax on the deducted amount.
Claiming Your Children as Dependents
You are considered the custodial parent if your child lived with you for a longer period of time during the year than your ex-spouse. As the custodial parent, you can claim your child as a dependent whereas the noncustodial parent cannot. The only situation in which a noncustodial parent can claim the child as a dependent is if the custodial parent signs a waiver stating he or she will not do so.
Claiming Child Tax Credits
Custodial parents who can claim their children as dependents can also claim child tax credits up to $2,000 (in 2020) and the American Opportunity higher education credit up to $2,500 or the Lifetime Learning high education tax credit up to $2,000. They can also continue to claim credits for childcare expenses if any were needed as a result of the parent's employment.
Did You Pay Your Child's Medical Bills?
Even if you cannot claim your children as dependents, you can include the costs of their medical bills in your medical expense deduction if you still pay for them.
Your Child Support Payments
Child support payments are not tax-deductible, and recipients of child support do not pay income tax on it.
Were Valuable Assets Transferred?
A divorce will inevitably involve shifting property from one spouse to the other. If you are receiving property, you do not pay tax on the transfer. If you get property in a divorce and sell it at a later point, though, you will be responsible for paying the capital gains tax on its appreciation from before and after the transfer. This is why it's crucial to consider both the value of the property as well as its tax basis.
Tax Implications for Selling the House
Sometimes spouses agree to sell the house in a divorce. If that happens, there are capital gains taxes to deal with. The law typically allows people to avoid the first $250,000 of gains in a primary home sale if the home was owned and lived in for at least two out of the five years prior. When married couples file jointly, the exclusion doubles to $500,000 as long as at least one of the spouses owned and lived in the home for at least two of the five years prior.
After a divorce is finalized and if the residency requirement is met, ex-spouses can each claim a $250,000 exclusion for capital gains taxation on their individual returns. A reduced exclusion can be claimed if neither spouse meets the residency requirements.
If you get the house in a divorce settlement and sell it later on, you can still only exclude a maximum of $250,000.
Retirement Asset Transfers
Your retirement savings can quickly become a delicate matter during divorce. Cashing out a 401(k) to pay your spouse can result in a taxable distribution – and you'll be the one paying that tax. You can avoid this from happening by transferring your assets under a Qualified Domestic Relations Order (QDRO). This gives your ex the right to receive the funds but relieves you of the tax liability.
If you're trying to transfer funds from an IRA, you don't necessarily need a QDRO to do it. If you don't use one, be sure to clearly spell out the transfer in the divorce agreement so the IRS won't consider it a taxable distribution.