Filing Taxes During a Divorce or Legal Separation

Understanding Filing Status During Divorce or Legal Separation

Your filing status is one of the most important factors in determining your tax obligations. In Arizona, your marital status as of December 31 of the tax year dictates your options.

This status influences not only how you file but also the deductions and credits you may qualify for.

If your divorce is finalized by year-end, you can file as single or head of household (if you qualify). Head of household status can be beneficial because it offers more favorable tax brackets and deductions compared to filing as single. To qualify, you must meet specific criteria, such as paying more than half of household expenses and having a dependent living with you for most of the year.

However, if you are still legally married on December 31, you may choose between married filing jointly or married filing separately. Filing a joint return often results in a lower tax burden, but it also means you and your spouse are both liable for any taxes owed.

• If your divorce is finalized by year-end, file as single or head of household if eligible.
• Filing jointly provides tax benefits but comes with shared liability for taxes.
• Ensure you meet all criteria for your chosen filing status.

How Does a Divorce Affect Tax Returns

Divorce impacts almost every aspect of your taxes, from income reporting to deductions. Understanding these changes can help you plan for your financial future and avoid surprises when filing your tax return.

Alimony and child support payments are two areas where divorce agreements significantly affect taxes.

For divorce agreements finalized before 2019, alimony is deductible for the payer and taxable for the recipient. For agreements finalized after this date, alimony is neither taxable nor deductible.

On the other hand, child support is not taxable for the recipient and cannot be deducted by the payer.

Arizona’s community property laws also play a role in dividing assets during divorce. Transfers of property between spouses are usually not taxable, but selling certain assets can result in capital gains tax. For example, selling a marital home may trigger tax liabilities if the value has increased significantly since its purchase.

• Alimony is taxable or deductible depending on the date of the divorce agreement.
• Child support has no tax implications for either party.
• Be aware of potential capital gains taxes when dividing or selling assets.

Child Tax Credits and Dependency Claims Under Arizona Law

Divorcing parents often face disputes over who gets to claim child-related tax benefits. The IRS typically awards these benefits to the custodial parent unless otherwise specified in the divorce or separation agreement. Resolving this issue during the divorce process can help avoid future conflicts.

The parent who claims a child as a dependent may be eligible for significant tax credits, such as the Child Tax Credit or the Earned Income Tax Credit (EITC).

The Child Tax Credit, for example, reduces the amount of taxes owed, while the EITC provides a refundable credit for low- to moderate-income taxpayers.

To claim these benefits, you must ensure your divorce decree clearly specifies who is entitled to them. Documentation is essential to prevent issues with rejected returns or audits.

• Custodial parents typically claim child-related tax benefits.
• The Child Tax Credit and EITC can provide substantial tax relief.
• Document dependency arrangements in your divorce decree to avoid disputes.

Property Division and Income Tax Liabilities

Dividing property during a divorce in Arizona can have significant tax consequences. As a community property state, Arizona requires that all assets acquired during the marriage be divided equitably. However, the tax implications of these divisions can vary widely.

For instance, receiving a home or other high-value asset as part of your divorce settlement could lead to capital gains taxes if you later sell the property. Similarly, transferring retirement accounts without proper legal documentation, such as a Qualified Domestic Relations Order (QDRO), could result in taxes and penalties.

It’s important to consider both the immediate and long-term tax implications of any property division. Consulting with a tax professional can help you navigate these complex issues.

• Be aware of capital gains tax on assets received in the divorce.
• Use a QDRO to avoid penalties when dividing retirement accounts.
• Understand the tax basis of all assets involved in the settlement.

Protecting Yourself When Filing a Joint Income Tax Return

Filing a joint income tax return with your spouse during a divorce can offer financial advantages, but it also exposes you to risks.

Joint filers are both liable for any taxes owed, even if one spouse is primarily responsible for the debt.

To protect yourself when going through a divorce, include provisions in your divorce agreement specifying how refunds or liabilities will be divided. You may also consider drafting a Tax Indemnification Agreement, which holds one party responsible for any errors or liabilities related to the joint return. If disputes arise, the IRS offers relief options such as Innocent Spouse Relief and Separation of Liability Relief.

• Specify refund and liability arrangements in your divorce agreement.
• Use a Tax Indemnification Agreement to mitigate risks.
• Explore IRS relief options if issues arise with joint filings.

Top 5 FAQs About Filing Taxes During a Divorce

1. What Filing Status Should I Use if My Divorce Is Not Finalized by Year-End?

If your divorce is not finalized by December 31, you can file as married, either jointly or separately. Filing jointly typically results in lower taxes but requires agreement from both spouses. Evaluate the financial implications before deciding.

2. Can Both Parents Claim the Child Tax Credit?

No, only one parent can claim the Child Tax Credit for each child. This is usually the custodial parent unless the divorce decree specifies otherwise. Ensure your agreement clearly outlines who can claim the credit to avoid IRS disputes.

3. How Does the Division of Retirement Accounts Affect My Taxes?

Retirement account transfers during divorce can trigger taxes and penalties unless completed under a Qualified Domestic Relations Order (QDRO). A QDRO ensures the transfer is tax-free and compliant with IRS rules.

4. Are Legal Fees for Divorce Tax-Deductible?

Legal fees for personal matters, including divorce, are generally not tax-deductible. However, fees related to obtaining tax advice or securing alimony may qualify for deductions. Consult a tax professional for guidance.

5. What Happens If My Ex-Spouse and I Both Claim the Same Child as a Dependent?

If both parents claim the same child on their tax return, the IRS will apply tie-breaker rules to determine eligibility. It’s best to agree on who will claim the child to avoid complications and potential audits.

Important Things to Remember During & After a Divorce is Finalized

• Finalize Filing Status: Your marital status on December 31 determines whether you file as single, married, or head of household.
• Child-Related Credits: Clearly document who will claim dependency credits in your divorce decree.
• Alimony Rules: Know whether your agreement’s date affects its tax treatment.
• Property Division: Factor in potential capital gains tax on assets you receive.
• Filing Jointly: Protect yourself with a tax indemnification agreement and clear terms in your divorce settlement.
• Seek Professional Guidance: A tax professional or divorce attorney can help navigate complex tax situations.

Filing taxes during or after a divorce can feel overwhelming, but you don’t have to handle it alone. At the Law Offices of Daniel Hutto, our experienced divorce attorneys understand Arizona law and its impact on your tax obligations and are available to answer any common divorce tax questions. We work closely with clients to safeguard their financial interests, whether it’s determining the best filing status, deciding if to file an individual tax return or file a joint tax return, addressing certain tax liabilities, or negotiating favorable terms for dependency claims and property division.

Take control of your financial future with the Law Offices of Daniel Hutto. Schedule your free 60-minute consultation today by calling us immediately at 602 536-7878 or filling out our online contact form. Let us provide the expert guidance you need to navigate this challenging time.