When you sign your divorce paperwork one of the last things you probably want to think about is your next tax return. However, your divorce agreement could drastically affect your tax liability. This means you may owe more or get a larger tax refund depending on how you complete your divorce agreement and when you sign it. Here are some things to consider when filing taxes after divorce, so you won’t be surprised come tax season.
Knowing your filing status now will help you be prepared for filing your taxes later. Your filing status depends on whether your divorce in Ohio is final on or before the end of the year. December 31st is the final day of the tax year. If you are divorced on or before December 31st, then you cannot file a joint tax return for that year. You can only file as single or head of household, if you qualify. If your divorce is not final until after the new year, you may still be able to file a joint tax return for the previous year. If you are eligible to file a joint tax return but do not want to, you can file as married filing separately.
If you have dependents and cannot file a joint tax return, filing as head of household may save you more on your taxes. Filing as head of household qualifies you for a larger standard deduction and can reduce your tax liability. It is important to remember that if you and your ex-spouse are sharing custody of your children, only one of you can file as head of household in most situations.
Claiming children as dependents can affect your tax liability, tax credits, and filing status. The IRS outlines exactly who can claim children as dependents. The person claiming the child as a dependent must be the custodial parent, unless Form 8332 is signed and filed (more below). Often, the divorce agreement names the custodial parent. If you qualify to claim your child as a dependent, you may qualify for the Earned Income Tax Credit, Child and Dependent Care Credit, and file as head of household.
If you are the noncustodial parent, you may still qualify to claim some credits, for example, if you pay child care. However, you will not be able to claim the larger tax credits unless the custodial parent signs Form 8332 allowing you to claim your child as a dependent. If the custodial parent signs Form 8332, the noncustodial parent will be able to claim the Child Tax Credit. The noncustodial parent must file the signed copy of Form 8332 with their tax return to qualify. If you as the custodial parent sign Form 8332, the child can no longer be claimed as your dependent. Only one parent can claim the child.
Understanding the tax implications of alimony and child support will be important come tax time. If you are required to claim alimony payments as income, you may need to make estimated tax payments to the IRS and State of Ohio throughout the tax year.
Alimony. The recent tax law changes affect how alimony is treated. If your divorce or separation agreement was signed after December 31, 2018, alimony payments are treated the same as child support payments. This means if you are receiving alimony payments, you do not have to include these payments as income on your tax return. If you are making alimony payments, you cannot deduct them on your tax return either.
If the agreement establishing alimony payments was signed before January 1, 2019, the opposite is true unless the modification states that the Tax Cuts and Jobs Act (TCJA) applies. This means that if you are receiving alimony payments, you must include them as income. And, if you are making alimony payments, you can deduct the payments on your tax return.
Child Support. If you receive child support, you do not have to include it as income on your tax return. This means you will not owe taxes on the amount you receive as child support. If you are the parent who makes child support payments, you cannot deduct the payments you make.
If you are employed and have major life events, like marriage or divorce, you need to update your W-4 and IT-4 with your employer. Your employer determines how much to withhold from your pay in federal taxes for the IRS based on how you complete your W-4 and state taxes for the State of Ohio based on how you complete your IT-4. If your filing status, income, or number of dependents have changed, it is important you update your W-4 and IT-4 with your employer. If your withholding information is not correct, it could drastically affect how much you owe when you complete your taxes.
Understanding the tax implications of filing divorce before you sign your divorce agreement will help ensure you are not caught by surprise come tax time. If you will be filing taxes after divorce or are getting divorced soon and want to know your liability, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group to understand how filing divorce in Ohio will affect your next tax return.