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Tax tips for the divorcing and the newly-divorced

by | Apr 4, 2022 | Finances And Divorce, taxes and divorce |

This is the time of year when lots of people have questions about their taxes. If you’re in the midst of a divorce or you’ve just completed a divorce, you’re likely among those, starting with wondering how to classify yourself on the tax form. It’s possible, depending on how you and your spouse handled finances and taxes prior to deciding to divorce, that taxes are something you haven’t had to think about before now

A recent Investopedia article we ran across provided some insights worth sharing, starting with some things you might not know about your filing status. When you get divorced can figure greatly into which filing status you need to go with. This year, filing for the income you generated in 2021, means that if your divorce hasn’t yet finalized, or it finalized in the first quarter of 2022, you need to count yourself as married for tax purposes.

You have two choices there: married filing jointly (MFJ) or married filing separately (MFS). As the article points out, choosing to file jointly “is almost always more beneficial, as it gives you greater access to tax credits that are not available if you file MFS. In 2021, the standard deduction for MFJ was exactly double the standard deduction for MFS.”

If you’re separated but not divorced, you’re still married for tax purposes, and should file as a married couple (save for one option we’ll cover in a moment) until your divorce is finalized. At that point, you have the option to either file as a single person or as a head of household.

Investopedia clarifies that you must meet three conditions to qualify for filing as a head of household — but it’s also an option for you while you’re legally married. Those are:

  • You are considered unmarried at year-end according to the Internal Revenue Service (IRS). To be “considered unmarried” while still technically married, your spouse must not have lived in your home the final six months of the year and you need to file separate returns, in addition to the other criteria listed here.
  • You have a qualifying person who lived in your home for more than one-half of the year (certain exceptions to this requirement exist for children away at school and dependent parents you care for).
  • You must have paid more than half the cost of keeping up your home for the year.

The article goes on to point out, “The best way to determine if you qualify is to use IRS Form 886-H-HOH which lays out all the documentation you need to claim head of household status.”

Filing as a head of household affords some advantages over filing single — as the article notes, “The standard deduction is higher for HOH than it is for a single filer. HOH allows you to qualify for certain tax credits (explained in more detail under the next section). In addition, the lower tax brackets have higher income limits for head of household than for single filers, which means effective tax rates for HOH filers are also lower.”

However, you can only qualify for this status as the parent of the child if you’re the custodial parent. The article explains, “The custodial parent is the one the child lives with for the greater number of nights of the year. If you have 50/50 custody of your child, the custodial parent is the one with the higher adjusted gross income (AGI), according to the IRS.”

“Additionally,” the article continues, “a noncustodial parent cannot claim their child for the purposes of the earned income credit (EIC), American Opportunity Tax Credit (AOTC), or the child and dependent care credit.”

While the child tax credit typically defaults to the custodial parent, a noncustodial parent can claim one or more child as a dependent provided the custodial parent signs IRS Form 8332, which releases the right to claim the child as a dependent.

There’s too much to get into for just one article — even though Investopedia packed a lot into its article — so we’ll pick this back up next week.