Divorce, Separation, and Taxes
A life event such as separation or divorce has many tax implications. Let efile.com help you with the tax part. Once you answer a few simple tax questions, we will help you prepare and efile your tax return using the correct tax forms for your situation.
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If you want more information on how separation and divorce may affect your tax return, read the sections below:
What Is Separation Versus Divorce As It Relates to My Taxes?
Whether you're separated or divorced affects your taxes in several ways including:
- Filing Status: If you are separated but have not obtained a final decree of divorce or legal separation by December 31 of a Tax Year, you can only file as Married Filing Jointly or Married Filing Separately since you are considered married for the entire year. If you are divorced or legally separated by December 31, you are considered not married for the entire year and you can file as Single or Head of Household (if you have a qualifying dependent).
- Dependents: When you're separated but not legally separated or divorced, you and your spouse can claim your dependent(s) on one joint tax return or file separate returns with the Married Filing Separately status and have one child claimed per return. If you are divorced and have a divorce decree naming a custodial parent, only the custodial parent can claim a child.
- Health Insurance Coverage: During separation, your health insurance coverage usually does not change. However, if you lose coverage through a divorce, it is considered a life event that allows you to enroll in health coverage through the Marketplace during a Special Enrollment period. You can report on your tax return that you had insurance throughout the year as a result (or you will need to claim an exemption or pay a penalty if you do not have insurance). If you and your former spouse are enrolled in the same Marketplace health insurance policy, you need to calculate your Premium Tax Credit amounts on separate tax returns and reconcile any advance payments that were made on your behalf.
- IRA Retirement Account Contributions: If you are not legally separated or divorced by December 31 of a Tax Year, you will be able to deduct any contributions you make to your ex-spouse's traditional IRA. Otherwise, you can only deduct contributions to your own traditional IRA.
A divorce or separation can impose many personal and financial changes. We at efile.com would like to resolve complicated tax questions for you. If you prepare and efile your taxes at efile.com you do not need to know all these details outlined here, but rather only answer a few simple online yes or no questions and we will do the rest for you. You can be assured that based on your answers your income tax return will be done in your best interest.
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Alimony Payments and Taxes
In order to determine whether you can deduct (as Alimony Payer) or must report (as Alimony Payee or Recipient) alimony payments, the year in which your divorce or separation agreement was finalized is the deciding factor.
2018 or Any Prior Year Finalized Divorce or Separation Agreement
- Alimony Payer: You can deduct alimony payments you make to your former spouse on the federal and state income tax returns for the Tax Year you make the payments. The new tax law changes of 2018 regarding alimony payments do not apply to you on your 2018 tax return or any tax return before or after, if your divorce or separation agreement was finalized during 2018 or any prior year. Please check your divorce or separation agreement for further details. You can claim the alimony payments made as a tax deduction if:
- It is in the form of cash (including checks or money orders)
- It is authorized by a court order for legal separation or divorce
- It is made only when you and your spouse are not members of the same household
- It is terminated upon your receiving spouse's death
- It is proper spousal support, not part of a child support payment or property division
- It is includable in your receiving spouse's taxable income, and
- You and your spouse do not file a joint tax return.
- Alimony Payee or Recipient: You must report the alimony payments you received from your former spouse as income on the federal and state income tax returns for the Tax Year you received the payments. The new tax law changes of 2018 regarding received alimony payments do not apply to you on your 2018 tax return or any tax return before or after, if your divorce or separation agreement was finalized during 2018 or any prior year. Please check your divorce or separation agreement for further details. You must report alimony payments received if they were made by the Alimony Payer to you in any of the forms listed above under the Alimony Payer section.
2019 or Any Later Year Finalized Divorce or Separation Agreement
- Alimony Payer: You cannot deduct your alimony payments you make to your former spouse on the federal and state income tax returns for the Tax Year you make the payments. The new tax law changes of 2018 regarding alimony payments do apply to you on your 2019 tax return or any tax return after, if your divorce or separation agreement was finalized during 2019 or any later year. Please check your divorce or separation agreement for further details.
- Alimony Payee or Recipient: You do not need to report the alimony payments you received from your former spouse as income on the federal and state income tax returns for the year you received the payments. The new tax law changes of 2018 regarding received alimony payments do apply to you on your 2019 tax return or any tax return after, if your divorce or separation agreement was finalized during 2019 or any later year. Please check your divorce or separation agreement for further details.
In summary, if your divorce or separation agreement was finalized during 2018 or before, alimony payments - paid or received - are permanently grandfathered into the alimony tax rules before the tax changes of 2018. If you prepare and efile your taxes on efile.com you don't have to worry about any of this since the software will ask you very simple questions and guide you through the tax preparation. If you have any other questions, please contact tax support.
Child Support and Taxes
- Child Support Payer: You can not deduct child support payments you made to your former spouse on your income tax return. Unlike alimony, nothing changes as a result of the new tax reform of 2018 for child support payments as it relates to your taxes. Child support is for your child or children and are paid to the spouse who lives with the children. Unless your divorce or separation settlement states that the payments can be considered alimony, you cannot deduct child support you paid to your former spouse on your tax return.
- Child Support Payee or Recipient: If you received child support payments, you do not have to report them as income on your tax return since the payments are tax-free, regardless of the year when your divorce or separation agreement was finalized.
Income Tax Examples of Alimony and Child Support Payments
Consider the following situations based on various divorce or separation agreements:
- Jan and Bob's divorce settlement dated July 31, 2018 states that Bob must pay Jan $150 a month ($1,800 a year) as alimony and $200 a month ($2,400 a year) as child support. If he paid the total of both yearly payments ($4,200), he can deduct $1,800 as alimony and she must report the $1,800 on her tax return as alimony received. However, if he only paid $3,600 in 2018, $2,400 of that amount is child support. Therefore, he can only deduct $1,200 ($3,600-$2,400) as alimony and she can only report $1,200 as alimony received on her tax return.
- According to their legal separation agreement dated December 31, 2017, Sue must pay George's dental and medical expenses. Unless the agreement states the payments cannot be claimed as alimony, she can claim a tax deduction on her alimony payments. He needs to report the alimony he received on his tax return and can include them when calculating his deductible medical expenses.
- In October 1984, Bill and Marge executed a written legal separation settlement. In May 1985, a divorce decree replaced their separation settlement. However, the divorce decree did not change the alimony terms in the separation settlement. Therefore, Bill can still deduct his alimony payments since the divorce decree is treated as issued before1985.
- Mary must pay Michael $8,000 a year in alimony and $4,000 in child support according to their divorce statement dated February 2, 2019. She cannot claim the alimony as a deduction on her return and he does not need to report the alimony as income on his return. The same applies for the child support payments.
Who Can Claim a Child As a Dependent After a Divorce or Separation?
Please use this easy, free and interactive tool to find out which divorced or separated parent can claim a child on an income tax return:
Start The DEPENDucator Tool
As a general rule, a child can only be claimed on one of the divorced/separated parents' tax return (use the Dependucator Tool to find out if it's you or not). You claim your child as a dependent on your tax return if the divorce decree or legal separation agreement names you as the custodial parent. Otherwise, the child is your dependent if they lived with you for a longer period of time during the year than with your former spouse. However, if both you and your former spouse claim the same dependent, the IRS will apply tie-breaker rules to determine which former spouse qualifies to claim the child.
Child Dependency Exemption
Starting with Tax Year 2018 (tax return due in April 2019) and ending with Tax Year 2025 (tax return due in April 2026), the dependency exemption for dependent children has been abolished. As of now, the dependency tax exemption will be reintroduced for Tax Year 2026.
The dependency exemption effectively stops with Tax Year 2017 (e-file deadline is Oct. 15, 2018) but does apply for 2017 and previous Tax Years for taxpayers who are filing back taxes.
What is the dependency exemption? Only one parent can claim the dependency exemption. The parent who claims the dependency exemption is also entitled to the $1,000-per-Child Tax Credit for children under 17, assuming his or her income is not too high.
This is usually a straightforward decision if you have a divorce decree which names the custodial parent. If not, you are considered the custodial parent if your child lived with you for a longer period during the year than with your former spouse. Sometimes the noncustodial parent can claim the exemption if the custodial parent signs a waiver pledging that he or she won't claim the child.
Sometimes, a parent will claim the dependency tax exemption when they are not entitled to it. If your former spouse files his or her tax return before you do, it is possible that he or she would be allowed the exemption, at least temporarily. Once the IRS looks at your return and they detect a duplicate Social Security Number (your child's SSN) being claimed by another taxpayer, the situation changes. Find out what happens when two people claim the same dependent.
Other Income Tax Return Considerations
Here are additional, important income tax return considerations for divorced or separated parents.
Tax Return Filing Status
The free, easy-to-use and interactive tool will determine the correct tax return filing status for you as a divorced or separated individual and/or parent:
Start The STATucator Tool
Simply answer several easy questions and the tool will present your filing status! If you are not yet officially divorced before the end of the year, you can still file a joint return with your spouse. You will lose the option to file a joint return when your divorce decree becomes final.
However, if you cannot file a joint return for the year, you can file as Head of Household (and get the benefit of a bigger standard deduction and more advantageous tax brackets) if you had a dependent living with you for more than half the year and you paid for more than half of the upkeep for your home. Otherwise, you may need to file as Single.
Medical Bills and Expenses
How will your divorce/separation affect your medical bills and expenses? If you continue to pay your child's medical bills after a divorce or legal separation, you can include those costs in your medical expense deductions even if your ex-spouse has custody of the child and claims them as a dependent.
Tax Credits For Parents
You can claim certain tax credits for being a divorced parent, such as the Child Tax Credit or an Education Tax Credit. If you do not claim the dependent, you cannot claim an education credit even if you pay any education bills.
Even if your former spouse qualifies to claim your child as a dependent, you can still claim the Child and Dependent Care Tax Credit for work related expenses you incur to care for a child under age 13. Remember though, only the parent who claims the child as a dependent can claim the Child Tax Credit.
Asset Transfer(s) and Taxes
Sometimes a divorce settlement will transfer property from one spouse to another. If that happens, the beneficiary doesn't pay tax on that transfer. It’s important to note that the property's tax basis will also shift. For example, if you receive property from your former spouse in the divorce and you later sell it, you will pay capital gains tax on all the appreciation before as well as after the transfer. So you need to consider the tax basis as well as the value of the property when you are splitting up property in a divorce settlement.
Retirement Assets Transfer and Taxes
During a divorce, it is important to carefully handle your retirement savings. If you decide to give your 401(k) money to your former spouse, the IRS may consider that a taxable distribution and you will be taxed on it. In order to avoid this, you should arrange for a transfer under a qualified domestic relations order (QDRO) which will allow your former spouse access to the 401(k) funds and you will not be stuck paying the tax.
Sale of a Home and Taxes
If you and your former spouse decide to sell your home when you get divorced, there may be capital gains tax impacts on you. Usually, you can avoid tax on the first $250,000 of gain on the sale of your primary home if you have lived in it for two out of the past five years of ownership. If you sell property after your divorce and if the two above provisions (own and live) have been met, you and your former spouse can each exclude up to $250,000 of gain on both of your returns. If the sale happens after the divorce, then you may qualify for reduced exclusion even if the two-year tests have not been met. Also, if you receive the house in your divorce settlement and then sell it some years later, you can exclude up to $250,000. The amount of time that your former spouse owned the house will be added to your period of ownership in the two year test.
Name Change After A Divorce
If you changed back to your previous last name as a result of a divorce or separation, you should notify the Social Security Administration (SSA) and report any changes made as soon as possible. When a tax return is efiled, the name must match both the SSA and IRS records. A name mismatch can result in a return that is rejected by the IRS when it is efiled. The return will then have to be paper filed which can result in a delayed refund. Learn how to change your name with the SSA and IRS.
Additional Related Tax Information on Divorce, Separation, and Marriage