A divorce can be one of the most emotionally trying times for a person. But what does it mean for your taxes? A lot, actually. We checked in with Lisa Greene-Lewis, TurboTax expert and CPA, to find out the top six things you need to know if you ended your marriage in 2019.
1. You Can No Longer Claim Alimony as a Tax Deduction
A major change in the new tax law went into effect after 2018: Alimony is no longer tax-deductible for the person paying it. It’s also no longer included in income for the recipient if the divorce was executed in 2019 (or modified to expressly state the repeal of the deduction for alimony payments). That’s good news for the recipient, who doesn’t have to pay tax on support, but not-so-great news for the payer, who doesn’t get a tax deduction.
2. You’ll Need to Adjust Your Filing Status
As soon as your divorce decree is finalized, you lose the option to file as married joint or married separate. In other words, your marital status as of December 31 of each year controls your filing status for that entire year. If you can’t file a joint return for the year because you’re divorced by year-end, you can file as a head of household, as long as you had a dependent living with you for more than half the year and you paid for more than half of the upkeep of your home. This will grant you a bigger standard deduction and gentler tax brackets.
3. And Determine Who’s the “Custodial” Parent
If you have kids, you can continue to claim your child as a dependent on your tax return if he or she lived with you for a longer period of time during the year than with your ex-spouse. In that case, you’re the custodial parent. It is possible for the noncustodial parent to claim a dependent child, but only if the custodial parent signs a waiver pledging that he or she won’t also claim that child.
4. You Can Still Claim Medical Expenses for Your Kids
As long as you’re the one paying them, you can include those costs in your medical expense deduction, even if your ex-spouse has custody of the child and claims him or her as a dependent.
5. You’ll Want to Review the Tax Implications of Any Asset Transfers
When a divorce settlement shifts property from one spouse to another, the recipient doesn’t pay tax on that transfer. (A silver lining!) But keep in mind that the property’s tax basis shifts as well when you take ownership, which means that if you decide to sell it at a later date, you’ll have to pay capital-gains tax on all the appreciation before and after the transfer. That’s why, when you’re splitting up property, you need to consider the tax basis in addition to the value of the property. What does that mean? Say you own a $500,000 home with a basis of $350,000 (meaning you and your spouse put $100,000 down and had a mortgage worth $250,000). If you decided to sell, you’d owe tax on the $150,000 increase in value—not just the appreciation value since you assumed ownership.
6. And the Tax Implications of Any Joint Home Sales
If you and your ex decide to sell your home, that decision may have capital-gains tax implications. Normally, the law allows you to avoid tax on the first $250,000 of gain on the sale of your primary home if you have owned the home and lived there at least two years out of the past five. Married couples filing jointly can exclude up to $500,000 as long as either one has owned the residence and used it as their primary home. For sales after a divorce, and if those primary residence standards are met, you and your ex-spouse can each exclude up to $250,000 of gain on your individual returns. Sales after a divorce can also qualify for a reduced exclusion if the two-year tests haven’t been met. That amount depends on the portion of the two-year period the home was owned and used. If, for example, you used the home as a primary residence for one year instead of two, you can each exclude $125,000 of gain. But if you receive the house as part of the divorce settlement and sell it down the road on your own, you can exclude a maximum of $250,000 gain, and the time your spouse owned the place is added to your period of ownership for the purpose of the two-year test.