Tax-filing season is upon us, and for some this may come with the anticipation of awaiting tax refunds, but for a couple amid a divorce, tax season may require additional thought and planning. New tax law changes have had a profound impact on how separated and divorced couples face their taxes in the coming years. Between changes in tax law and living through a pandemic, people may find that preparing their 2020 taxes is turning out to be a bigger challenge than usual, and the challenges are greater for those that have recently gotten divorced, as they face alimony payments, child custody arrangements, and other divorce-related issues.
There are many reasons why many choose to file their tax return as quickly as possible. Taxpayers would receive their refund quicker, it would protect them from tax identity theft, and it could also help them during the latest rounds of stimulus checks. But experts are advising those who recently got divorced to hold off filing if they want to see a bigger stimulus check.
The American Rescue Plan Act, the recently signed COVID-19 relief bill, will expand the CTC benefit from $2,000 annually to as much as $3,600 per child. The tax break is available to individuals who earn up to $75,000 a year and to heads of household who earn up to $125,000. Although the CTC for 2021 is being considered a temporary relief, legislators are seeking to make the benefit permanent.
When the IRS is ready to calculate the amount of your third stimulus check, they’ll need to know your tax filing status, how many dependents you have, and your adjusted gross income. Your marital status could have an impact on your stimulus check depending on how the divorce will affect the $150,000 income threshold for couples compared to what it might be as an individual, especially if one spouse makes much more money than the other. If you have gone through a divorce and have not yet filed your 2020 tax return, the IRS would be forced to use your 2019 tax return to process the stimulus check.
One aspect recent divorcees will have to oversee is changing their tax filing status, which could have a major impact on their taxes. According to the IRS, your marital status as of December 31 will control your filing status for that entire year. Smart Asset reports that you cannot file a joint tax return if you completed your divorce on or before December 31, which is the final day of the tax year. If the new year started before your divorce became official, the IRS will still recognize you as married, and therefore allow you to file a joint return for the previous year. If you are eligible to file a joint return but choose not to, you can choose the married filing separately status. If you’re no longer married, you’ll need to choose between “single” or “head of household,” depending on how you qualify. According to a report by Kiplinger, filing as head of household allows you to claim a larger standard deduction, as well as earn more income before climbing into a higher tax bracket. One way the IRS will allow a person to qualify as head of household without having their divorce finalized is if they no longer lived together for the last six months of the tax year and if they paid more than 50% of the home maintenance costs that year.
For years, tax law provided that payments for alimony could be deducted by the payer for federal income tax purposes, while the recipient of those payments was obligated to include that amount as part of their taxable income. However, many are still unaware of the changes that were brought on by The Tax Cuts and Jobs Act (TCJA), the massive new tax law enacted by Congress in 2018. Those thinking of going through the divorce process now should be aware that if they pay alimony, they will no longer be able to deduct those payments from their taxes, and those receiving alimony will no longer have to include it as income. The year in which your divorce or separation agreement was finalized will be the deciding factor to determine whether you can deduct or must report alimony payments on your 2020 tax return.
During tax season, another issue divorced parents face is deciding who will be able to claim the children on their taxes after the divorce has been finalized. The IRS states that if you are no longer filing jointly, you and your former spouse cannot both claim the children on your tax return in the same year. You can claim a child as a dependent if he or she is your qualifying child. Generally, the child is the qualifying child of the custodial parent, which is the parent with whom the child lived for a longer period of time during the year. The parent claiming the child for the tax year will also be able to claim the Child Tax Credit (CTC). Many divorcing parents reach agreements regarding the sharing of the dependency deductions from year to year. Be sure to discuss this option with your attorney.
If you’re going through a divorce, you will want to consult with a tax professional and you should consider meeting with a financial advisor who can help divide assets and craft a plan for a stronger financial future.