Two things most sane people seek to avoid are divorce and taxes. Unfortunately, when you’re going through a divorce, not paying attention to taxes can cost you thousands. That’s especially true with the tax law changes that went into effect in 2018 and 2019. Now more than ever, not understanding how taxes will affect your divorce can be a very expensive mistake.
1. Tax Status
The first thing you’ve got to remember about filing taxes after divorce is that your tax status is going to change. Married filing jointly is the most tax-favored way to file taxes. Once you’re divorced, you will lose that status.
Lots of people think that as long as they were married for some part of the year, they can still file taxes as married filing jointly. That’s not true.
Your marital status for income tax purposes is determined as of December 31. If you were married on December 31 you will file your taxes for that year as married. If you were divorced, your only option is to file either as a single person, or head of household.
2. Taxes on Alimony
Historically, alimony (also known as maintenance or spousal support) was tax-deductible to the person who paid it. The person who received alimony was the one who paid the tax on the income.
This was known as the alimony tax deduction, and it often made settling divorce cases easier. That’s because the spouse who received alimony was usually in a lower income tax bracket than the spouse who paid alimony. The alimony tax deduction allowed the couple to shift income from the higher earner to the lower earner. As a result, both spouses paid less in taxes than they otherwise would have paid.
Unfortunately, effective January 1, 2019, Congress eliminated the alimony tax deduction.
Now alimony is no longer tax-deductible to the person who pays it.
That means that if you’re paying alimony to your spouse you have to pay taxes on the income you earn at your income tax rate. Then you have to use your post-tax dollars to pay spousal support to your ex.
3. Personal Exemptions
Before 2018, when you filed your taxes, you got to claim yourself, and each of your kids, as dependents on your taxes. Known as “personal exemptions” or “dependency exemptions,” these tax breaks allowed you to subtract a certain amount of money from your taxable income for every dependent you claimed. The more dependents you claimed, the more money you could subtract.
Unfortunately, from 2018 through 2025, no one gets a tax exemption for claiming the kids as dependents. But then in 2025 (theoretically, at least!) the dependency exemption will spring back to life. Although neither parent will get a tax exemption for claiming the kids as dependents through 2025, theoretically, that will change in 2026 and beyond. So, if your children will still be underage in 2026, you and your soon-to-be-ex still need to decide who gets to claim the dependency exemption for them from 2026 on.
Finally, while the dependency exemption itself may not be worth anything for a few more years, deciding which parent can claim which child as a dependent may affect the child tax credit.
The bottom line is that, divorcing parents still need to decide which parent is entitled to claim which child as a dependent in any given year.
4. Child Tax Credit
Even though the dependency exemption has no value (at least through 2025) unless a parent has the right to claim a child as a dependent, that child might not qualify for the child tax credit on that parent’s income taxes. That’s why, in your divorce, you still need to negotiate which parent can claim each child as a dependent in every year.
If you don’t say who can claim the child as a dependent, you risk losing the child tax credit. The child tax credit directly reduces the amount of income tax you pay. So, it doesn’t just reduce your taxable income. It reduces your taxes.
5. Health Insurance
Not considering how claiming the children on your taxes can impact the health insurance you get for them on the Health Insurance Exchange has become an expensive trap for the unwary.
Most divorcing spouses agree to split the right to claim their children on their taxes in any given year. So either, mom gets to claim the kids in even years and dad gets to claim them in odd years, or mom gets to claim Child A, Dad gets to claim Child B, and they alternate claiming Child C. Doing this is easy and it seems fair enough.
But if dad claims Child B on his income taxes while mom gets health insurance for Child B through the health insurance exchange based on her taxes, mom might end up having to repay the government for that portion of Child B’s health insurance that the government subsidized! The same thing is true if mom claims the kids on her taxes in one year, but dad gets health insurance for the kids through the exchange based on his income.