Divorce is difficult enough. What could add to the anxiety that divorce brings? Taxes. If you are one of the many people who recently divorced this year, as a result you will be coping with new tax issues, and you may be filing your own tax return for the first time. Here are several tips to help you handle tax issues in the year of your divorce.
- Determine your filing status. Your marital status at the end of the year determines how you file your tax return. If you were divorced by midnight on December 31 of the tax year, you will file separately from your former spouse. If you are the custodial parent for your children, you may qualify for the favorable head of household status. If not, then you will file as a single taxpayer, even if you were married for part of the tax year.
- Review your divorce decree to see who will claim the children as exemptions. If the divorce agreement did not specify who claims the children as exemptions, then the exemption for your kids goes to the custodial parent. If you have joint custody; the exemption goes to the parent who has the child the greatest number of days during the tax year.
- For 2021 only, individual tax returns qualify for a child credit of $3,000 ($3,600 if under 6 at 12/31/2021) for children under age 18 on the last day of the year with a social security number claimed as a dependent on the return. The full credit amount is refundable. The increased amounts begin phasing out at $112,500 and $75,000 for heads of household and single returns, respectively.
- Get signed Form 8332 if required. If you are entitled to claim the tax exemption for children who spend less than six months of the year living with you, then you will need your ex-spouse to sign IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents). A copy of this form must be filed with your income tax return for you to claim the tax exemptions for children not living with you.
- File first if exemptions are an issue. If you are entitled to claim the children on your return, but your ex threatens to claim them instead, file early in the year. That way, since you have already claimed the children, the IRS will make your ex prove he or she was entitled to the exemption.
- Claim the childcare credit if you are eligible. If you are the custodial parent and you incur work-related childcare for children under the age of 13, you may be able to claim a credit for a portion of the cost. Unlike the exemption, which can be assigned using IRS Form 8332, the childcare credit is available only to the custodial parent. For 2021 the maximum credit is $4,000 per child.
- If you are employed, consider changing your withholding on Form W-4. Your new filing status comes with a different tax rate schedule then you had as a married person. Updating your withholdings mid-year is a prudent idea to ensure you are not unpleasantly surprised with a large balance due at tax filing time.
- Make estimated tax payments if withholding is not enough. If your withholding will not be enough to cover your taxes for the coming year, set up quarterly estimated tax payments so that you will not owe taxes and underpayment penalties at the end of the coming year.
Divorce may not be as inevitable as taxes, but it certainly brings complications to tax filing. Follow these tips, and the process should go more smoothly in the first year.
Team Up with Professionals You Can Trust
At Northstar Financial Planning, our firm is owned and operated entirely by women, which means that many women going through a divorce may feel more comfortable when retaining our services. We endeavor to make your experience as straightforward and painless as possible, helping you navigate the financial aspects of your divorce, before, during and providing ongoing support after the settlement is finalized.
If you or someone you love is facing a divorce, we encourage you to reach out to our team of professionals who will help you equitably settle this chapter of your life and plan for a bright financial future ahead.