Divorce profoundly changes the lives of everyone involved. Husbands, wives, and children find themselves unsure of how to handle all the intricate details during litigation and after legalities have waned away. Regardless of how long you’ve been married, being prepared for the transition is important. Changes to living arrangements, childcare, and asset allocation are always at the forefront of divorce, but there are many other factors that need to be considered. One of the more subtle changes following a divorce is how to navigate taxes. If you took care of the taxes during marriage, you may have already prepared for how your taxes would change following a divorce. If your partner took care of joint filing, this is an environment you’ll need to learn how to navigate. While many women today are in fulfilling careers earning their own salaries, understanding how your taxes will change is crucial to your long-term financial goals. Here, we’ll discuss 5 things women should know about taxes after a divorce.
1. Change Your Tax Filing Status
Your filing status for the year is determined based on marital status as of December 31. Once you finalize your divorce, you’ll need to change your tax filing status as soon as possible. When making this change, there are two options for your new status: single or head of household. If you’re going to be taking custody of at least one child for more than half of the year, you’ll be designated as head of household. This comes with additional requirements and changes to how you’ll navigate your taxes. If you will have custody of your child for less than 6 months of the calendar year, you’ll utilize a single tax filing status.
2. Navigating Homeowner Deductions
How you’ll navigate your homeownership depends on the litigation with your spouse. In some divorces, both partners continue to share the mortgage. This means that you’ll need to determine who will cover the mortgage interest, real estate taxes, and how to properly allocate tax deductions. This aspect of taxes after a divorce can get complicated, especially if there are children involved. However, since homeowner tax deductions are significant ways to reduce taxes owed, taking the time to clearly understand and properly allocate deductions is essential to a fair division of assets.
3. How to Claim Children as Dependents
A child cannot be claimed as a dependent on both parent’s taxes when they are filing separately. The parent who will claim children as a dependent should be something that’s discussed during your settlement agreement. When a clear-cut answer is not discussed or determined during the settlement, deductions usually default to the parent who has primary custody. If you have more than one child, each dependent can be claimed by a different parent. This means, in the case of three children, one partner could claim two dependents while the other claims one. Determining which children will be claimed by which parent should also be discussed, as once the children reach 18, parents no longer receive tax exemptions. There is also the possibility for parents to discuss a year-by-year trade. This means that one year, one parent would claim the child or children as dependents and the next year, the other parent would claim them. Again, this can get a little messy, so working with a professional is recommended. It’s also recommended that you do not discuss this aspect of divorce with your children, as younger kids can misconstrue the nature of claiming them as a dependent.
4. Post-Divorce Income and Tax Payments
The nature of your household’s income will change following a divorce. This comes as no surprise, as your accounts will no longer be associated, but it’s still something that needs to be considered. If both parents in a household have a steady, independent income, the change may not be as drastic. If your income is significantly different, discussing alimony with your attorney and ex-spouse is important. However, alimony is extracted from a paycheck without taxes withheld. This means that you’ll need to pay taxes every year on the alimony money. So, while you’re going to be getting some financial support, it’s not tax-free. To avoid any problems come tax season, it’s recommended that you pay quarterly taxes on any alimony. You may also need to make changes on your W-4 if you’re employed. After a divorce, your tax bracket will likely change, and you’ll want to reflect these changes in your W-4 to avoid penalties or overpaying. If you have questions regarding these changes, talk to a CPA.
5. How to Divide Investments
One of the more complicated aspects of understanding taxes after a divorce involves your joint investments. This includes details on dividing any retirement accounts, life insurance, 401(k) accounts, traditional or Roth IRAs, and more. If you’re not sure how to navigate these assets or their associated taxes, working with a knowledgeable financial advisor is your best option. Financial advisors will help you better understand how your portfolio will change after a divorce and give recommendations on changing your risk strategies—both of which can change how you file your taxes.
While heads of the household have historically been men, that’s no longer the case. Many women today are either the sole earner in the household or match their partner’s income. In these cases, women in marriages may be designated as the head of household. Due to this, it’s important for both men and women to know these things about taxes after a divorce. Regardless of status, taxes will make a big impact on your finances throughout the year and when it comes time to file. To help navigate the intricacies of taxes while building a strong financial future, work with an experienced financial advisor. Financial advisors like William Bevins can help you properly manage your wealth so that you can enjoy the freedom you deserve while managing your taxes after a divorce. To learn more, or schedule a free consultation, call the office of William Bevins today at 615-469-7348.