Navigating tax time as a newly single person (or a nearly single person) takes a few adjustments. For smooth sailing, follow our tax tip checklist.
To paraphrase the adage that the only certain things in life are death and taxes, there are two things in life that no one, and I mean no one, thinks of as fun: divorce and tax returns.
If you’ve just been through a divorce, let me offer my condolences. That first holiday season after a spilt is a rough one, and quick on its heels comes the first tax season. But the good news is that making a few key changes to how you file your tax return is a comparatively simple matter. There are just a few steps to bear in mind.
Don’t Wait Until April 14
It’s understandable if after a divorce, you find yourself preoccupied with matters of major importance, like finding a new home or working out custody of the kids. But getting ahead of these tax issues is a straightforward process that prevents a mountain of panic and aggravation (and an IRS audit!) later on. Find a CPA as soon as possible, and start sending them your documents early, so if there’s something missing, they will have time to help you get it.
Start Fresh: Choose Your Own CPA
If you and your ex used the same tax preparer when you were filing jointly, it’s time to make a fresh start with a new one. You may lose some of the convenience and continuity of returning to your previous CPA, but you gain the value of a clean break from your ex and the financial services you used together. Your prior CPA should also be happy to provide you copies of any and all of your prior tax returns.
It’s helpful to bring your previous year’s tax documents when meeting with your new CPA – much as you would when transferring medical records to a new doctor. And while you don’t need to go into detail, do make sure they’re aware of your recent change in marital status. It is also helpful to bring along a copy of your divorce judgment, so they can be aware of any implications of your divorce other than your marital status on your tax filing – like whether or not you are entitled to take minor children as exemptions.
Make a Clean Break with Your Bank Accounts.
If you haven’t already, it’s time to open new financial accounts in your name alone. You should no longer use any accounts that your ex could have jointly accessed. Don’t try to run out the last of your checks with both your names on them — order new ones. A clean financial house will not only make for a tidier future, if your ex winds up being audited, you will be insulated from that, as well as from any other financial difficulties they may find themselves in.
Clean House
If one partner continues living in a formerly shared home, and you’ve already come to a financial agreement to separate ownership of the house, ensure that the departing partner’s name has been removed from the home’s title. If that isn’t taken care of, both partners will be held equally liable by the IRS should property taxes go unpaid, or if a lien is placed on the house. This is normally memorialized in your divorce judgment paperwork.
If Your Divorce Is Still Pending, File as ‘Married filing Separately’
If you are still legally married on Dec. 31, you can file as “married filing separately” and still benefit from that filing status, while also protecting yourself if your ex makes an error in their tax filing. Further, you won’t be liable for any debt they’ve incurred, any tax fraud they’ve committed, or any number of difficulties your former spouse might create for themselves.
If the Divorce Has Been Finalized, File as ‘Single’
If you are no longer legally married on or before Dec. 31, your filing status should be “single.”
You won’t get double deductions, but you most likely won’t be reporting two incomes, either, and you might potentially even drop down a tax bracket.
Your CPA can help you get acquainted to your new single filing landscape, figuring out your deferred spending accounts, your retirement funds, and everything in between. It’s best to start putting a plan in place for your solo financial life as soon as possible, for both financial and emotional reasons.
Sort Out Child Care and Other Deductions
Under IRS rules, the parent who has the minor child more than 50% of the time is entitled to claim the child as a dependent for tax purposes. If the parents share equal time, then the parent with the higher adjusted gross income (AGI) is entitled to take the minor child as their dependent. The parent who is entitled to take the child as a dependent can also “waive” their exemption if there is a financial advantage to doing so for the parents.
If the parents have two children, they can each claim one child as a dependent on their tax return, or if they only have one child, parents could take turns claiming the child as a dependent in alternate years to spread the tax benefit of parenthood. But any arrangement needs to be articulated in a divorce settlement agreement — in addition to who gets responsibility for children, sort out who gets the dependent exemption. Remember, child support amounts are highly influenced by who claims the children as dependents.
Child tax credits are both separate from and influenced by the IRS rules regarding dependents. A party who is entitled to claim the dependent is entitled to claim the child tax credit (assuming they otherwise qualify to do so). However, unlike the dependent exemption, the child tax credit cannot be “waived” — so only the parent who has primary custody of the child under the IRS rules will qualify for the child tax credit.
Having a clear separation of your finances and divorce decree that clearly spells out these details will be key to making a solid new beginning.
About The Author
Brent Kaspar, CPA, Esq.
Founding and Managing Partner, Kaspar & Lugay
Kaspar & Lugay LLP was founded by Brent Kaspar, Esq. and Arvin Lugay, Esq. Mr. Kaspar is the managing partner. He is a member of both the California Bar and the California Board of Accountancy. Mr. Kaspar has a unique skillset as both an attorney and Certified Public Accountant, a rare and valuable combination for the firm’s clients. He earned his JD from the University of Tulsa School of Law and his Bachelor of Science in Business Administration Accounting from Oklahoma State University.
