Common Tax Issues for the Recently Divorced or Separated

Because of the numerous additional factors that now apply to your situation, there are likely many new concerns or questions you have once you start checking off boxes on your tax forms.
02/04/2016 01:47 pm ET Updated Feb 04, 2017

Tax season is officially upon us, as employers had a January 31 deadline to issue W-2s to their employees and an IRS filing cutoff of April 18. While completing your taxes is generally a burdensome and unpleasant task, this often complicated process becomes even more challenging for those in the middle of divorce or for people filing during the first tax year after a marriage has ended.

Because of the numerous additional factors that now apply to your situation, there are likely many new concerns or questions you have once you start checking off boxes on your tax forms.

It is crucial that you understand what has changed, since any errors in your filing could potentially result in an IRS audit -- an even more unpleasant process that will only serve to compound the difficulties you are already facing with an ongoing or fresh divorce.

Additionally, you will want to ensure you are taking full advantage of any tax benefits to which you are entitled so you receive the biggest return possible and avoid any unnecessary payments.

Determining filing status

One of the very first steps to filing your taxes is to determine what your filing status will be for the year. While this is usually a fairly easy point to figure out when are married -- most likely married, filing jointly -- there are several different options when you are going through a divorce.

First, your status of married or single will depend on if a decree of divorce has been issued during the tax year in question.

For example, if you are going through a divorce that is finalized before December 31, you are considered unmarried for the entire calendar year. This means even if your marriage was not officially dissolved until December 30, you are still considered unmarried for all of 2015 and will file as either single or head of household, if you qualify.

If your divorce is not finalized, however, you will have to file as married filing jointly or married filing separately even if you have been separated for the entire year.

Obviously, each of these options will come with varying liabilities and depending on the status you choose, so it is important to determine which option offers the best possible benefits -- even if it means getting together with your soon-to-be ex for one last joint return to take advantage of the benefits offered by married filing jointly.

Child dependency exemptions and credits

Which parent is able to claim a child for the dependency exemption and applicable tax credits is another area that can be tricky for recently divorced couples since only one parent is eligible to claim a child when filing separately.

As a general rule, whoever is named as the primary custodial parent in your settlement agreement is eligible to claim the child on their return. If it is not specifically mentioned or you do not have orders specifying who has primary custody, then the parent who had the child live with them for the longest period of time during the year would claim the child.

However, parents during divorce are able to negotiate between themselves who gets to claim the exemption, and the court can also order that the non-custodial parent receive the benefits as well.

This often makes more sense in situations where the custodial parent has a low income with limited tax liabilities and the non-custodial parent has a much higher income with a child support obligation.

In cases where the non-custodial parent receives the exemption, the custodial parent must complete IRS Form 8332, Release / Revocation of Release of Claim to Exemption for Child by Custodial Parent, and attach the form to their return.

If both parents try to claim the child, you run the risk of being audited by the IRS, so it is best for both parties' interests to be sure they are on the same page when it comes to who gets to claim the child.

Additional tax concerns

There are many other tax issues that may arise -- both big and small -- for recently separated or divorced couples that will be taken into consideration on a situational basis.

Since every divorce is unique, some or all of these concerns may come into play, so it is important to speak with an attorney or tax professional to ensure you are not missing anything that would cause an IRS audit or additional expense on your end.

Taxability of child support -- child support payments are not deductible by the payor or taxable by the payee.

Taxability of alimony -- alimony (spousal maintenance) payments are tax deductible by the payor and must be claimed as income by the recipient. It is a good idea to include federal tax code IRC 71 directly in your decree to ensure both parties are aware of their responsibilities and prevent a claim of ignorance when it comes time to file.

Taxability of property transfer -- a transfer of property between divorcing spouses does not induce any additional tax liabilities if it is ordered under the decree of divorce.

Taxability of retirement transfer -- to avoid any additional taxes that may be applicable for early withdrawal penalties from qualified retirement plans, a Qualified Domestic Relations Order must be drafted after the divorce is finalized to instruct the plan administrator to pay out benefits to your former spouse.

With the plethora of online tools available to file taxes at little or no cost, many have taken the opportunity to avoid the fees associated with utilizing a tax professional. However, it may be a good idea for the recently divorced to have a financial advisor, such as an accountant or CPA, look over your return to ensure there are no errors and you are maximizing your return.

For more information about common tax issues that arise after divorce, check out the latest Men's Divorce Podcast: Taxes And Divorce.