Two significant life events that can have a big impact on your taxes are marriage and divorce. And with this year’s tax deadline moved to May 17, if you are in the process of divorcing or are newly divorced, it’s important to understand the effects your divorce may have on your 2020 tax filing. If you are filing your taxes for the first time since your divorce, ensure you read these Q&As about Tennessee taxes and divorce so you can avoid making some common mistakes.
How do I file my taxes when getting divorced?
This year’s tax filing is for your 2020 taxes, so if you and your spouse were not yet divorced at the end of 2020 (even if you were separated), you have two options. You may file a joint tax return, or you may file as married filing separately.
You may no longer file jointly or married as of the year your Tennessee divorce becomes final. So, if your divorce was final as of December 31, 2020, you can now file as head of household on your own tax return if:
- You are paying for half of the upkeep of your home
- Have a dependent living with you for more than half the year
Otherwise you will file as single.
Who can claim the children as dependents on taxes?
Tax rules regarding dependents in divorce can get tricky, depending on your child custody agreement. Claiming a dependent gives parents certain tax breaks and deductions, but only one parent can claim each dependent per year. Some parents build this into their custody agreement – one parent claims the child as a dependent one year, the other parent claims them the next. Otherwise, the IRS uses what’s called the “tiebreaker rule.”
According to The Balance, “the parent who has custody for the greater part of the year typically gets to claim the child as a dependent for tax purposes. The parent with the higher adjusted gross income (AGI) gets to claim the child if custody is split exactly 50/50—which is technically difficult when there are 365 days in a year…One parent is likely to have the children for at least one more night than the other, even in perfectly scheduled shared custody arrangements. The IRS would give the right to claim to that parent.”
Important note! If both parents attempt to claim the same child on their taxes, the IRS will reject either one or both returns.
If my spouse has tax debts, am I responsible?
It depends on your filing status. Whether you file jointly or separately affects your liability regarding tax debt. Because filing jointly offers many tax breaks, most married couples choose to file this way. However, doing so also means that if you spouse owes money to the IRS – you do, too.
Can I get a tax break for paying alimony?
Under new tax laws, you can only deduct alimony from your taxes if your divorce was finalized before January 1, 2019. Read more here. It is important to have alimony, and child support, spelled out completely in your divorce agreement. If you have questions about these sometimes-confusing tax laws, consult with a trusted family law attorney.
How can we split our retirement assets without tax penalties?
During asset division in divorce, you must be careful when allocating retirement assets in order to avoid tax penalties. For example, if you cash out a 401(k) to buy out your spouse’s interest in the family home, the IRS does consider this taxable income. You can avoid this penalty, however, by using a Qualified Domestic Relations Order (QDRO). A QDRO allows you or your spouse to transfer a portion of the funds from a 401(k) without tax penalties. If you choose to cash out the fund, however, you will have to pay taxes on it.
An IRA does not require a QDRO, but if you plan to transfer an IRA to your spouse in a divorce, ensure this is spelled out in your divorce agreement to limit any tax liabilities.
We sold our home in the divorce. Will this be a tax issue?
Yes, if you sold your home in the 2020 tax year, you may owe the IRS. These tax issues get complicated and are best handled with a good tax attorney or accountant. Credit Karma explains, “If you sell your home at a profit, this might have implications for your taxes, as you could owe capital gains taxes on your portion of the profit. But many divorcing couples qualify to exclude part of those gains, which helps to avoid getting hit with a big tax bill.”
A few other things to keep in mind:
- If you are employed, don’t forget to update your W-4 following your divorce. This is the tax form that tells your employer how much to withhold from your paycheck. Post-divorce, you may want to adjust this amount. SmartAsset provides a guide to filling out a W-4 on their website.
- If you were still married at the end of 2020, your federal stimulus check is likely considered marital property. This means it is a shared asset and should be treated as such. Your stimulus payment should have been deposited in the bank account the IRS has on record for your tax return, or to the spouse who received the payment in the last round. More on stimulus checks and divorce here.
At Shepherd & Long, P.C., our Maryville family law attorneys are here to answer all of your questions about divorce. We can help guide you through the process, protecting the best interest of your family, and especially your children. We represent clients throughout East Tennessee. Schedule your free consultation today by calling a member of our caring legal team at 865-982-8060, or we invite you to complete our contact form.