Simple Tax Mistakes To Avoid Making After Divorce
Taxes are complicated. Divorces are complicated. Put the two together and the result is an impossibly complex web of personal, financial and legal mistakes just waiting to be made. The first mistake is not seeking professional help. Hire a tax attorney or accountant who specializes in divorce if you can afford one. If not, seek out any free services you might qualify for. Learning as you go by yourself almost guarantees unforced errors. After that, avoid these seven common and costly mistakes — they’ll only make an already bad situation worse.
Getting Your Name Wrong
This one seems super obvious, but the name on your tax forms has to match the name on your Social Security card. If you changed your name after a divorce and didn’t get your paperwork in order, your return will likely be rejected or your refund delayed.
Not Agreeing on Your Tax Status
Your marriage status on Dec. 31 determines your tax filing status for the entire year. Unless the divorce is finalized by then, a separating couple has to decide whether to file jointly or separately. Variables too numerous to discuss here will determine which makes more sense on a case-by-case basis.
Find Out: Tax Year Deadline Dates You Need To Know
Once a divorce is finalized, one or both parties might be able to file as either “head of household” or “single.” In this case, too, the choice makes sense or doesn’t based on a variety of factors that are unique to your situation. In both cases, a lot of money could hinge on your decision — so don’t guess.
Failing To Agree on Dependent Credits
The IRS allows only one parent to claim the child tax credit and issues rules to determine which parent that is. In most cases, the parent who has majority physical custody claims the credit, but not always. Divorce settlements can also be structured so that both parents alternate, with one claiming the credit every other year. In other cases, each parent might claim different credits associated with different dependents.
Not Understanding How the Tax Treatment of Alimony Has Changed
The 2017 Tax Cuts and Jobs Act eliminated many longstanding deductions. Among the most consequential for divorcees was alimony. Starting with divorces settled on Jan. 1, 2019, alimony is no longer a deductible expense.
Not Taking the Tax Breaks Associated With Property Sales
If you and your spouse sold a home as part of your divorce, and that home was your primary residence for two of the last five years, you might be able to benefit from a lucrative tax break. Provided you meet the criteria, you can deduct up to $250,000 as a single filer or $500,000 as a joint filer from your taxable gains.
Not Understanding How the IRS Treats Asset Transfers
Generally, assets transferred at divorce don’t have tax consequences, but the reality is more complicated than that. You might, for example, not pay taxes on an asset awarded to you during a divorce, but you might have to pay taxes on any money you make from selling that asset later on down the road.
Attempting To Split Up a Retirement Fund
It’s no secret that early withdrawals from retirement accounts trigger stiff penalties. It’s possible for a married couple with a joint account to divide their nest egg and part ways, each with their fair share, without being slapped with early withdrawal penalties. You absolutely can’t, however, simply transfer half to one person or the other, and just part ways. That can only be done through what’s called a qualified domestic relations order (QDRO), which you’ll have to apply for before you remove or transfer any money.
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