Eight tax planning tips for women after getting a divorce

Divorce is often financially and emotionally difficult, especially for a woman who may have given up or reduced her career after having children.

When a woman goes from being married to being single again, she goes through many changes in her life. Transitions can be difficult, and you need to manage new living circumstances, child custody, job, and many more.

So it’s no surprise that one of the last things many divorced women consider are taxes. However, taxes are something that none of us can avoid. And having awareness of your obligations and making plans can help to reduce any shock later.

So, to help you plan for your taxes, we asked an expert to explain why you need to understand about post-divorce tax implications. Here are eight tips they recommend.

1) Get organized first

Start by gathering necessary financial documents, including:

  • Tax returns
  • Bank statements
  • Credit card statements
  • Retirement accounts and other formal documents.
  • Make a method for keeping track of information and passwords that is up to date.

Next, examine your household’s finances to create a financial plan for yourself and your children. Understand your options and the actual value of your marital assets.

It isn’t easy to decide when you don’t know what you’ll need to survive. You should pay debts that you incurred. So, it is advisable to not incur unsecured debt like payday loan debt or credit card debts while planning for a divorce with your spouse. You may need to seek debt relief for your existing debts that can complicate your tax situation after divorce.

2) Understand the alimony tax rules properly

If your ex-spouse paid you alimony or provided you money each month to keep your house and life going, you’ll almost certainly owe taxes on that money. Your ex-spouse can deduct the payments, and the IRS has rules on what counts as alimony and when the recipient can deduct the expenses. 

If you and your husband continued to live together after the divorce and he paid you alimony, you will owe taxes on those payments, which he will not be able to deduct.

3) Tax implication on obligations

According to federal law, you must record all income while completing your tax return. Child support is neither taxable as income for the parent receiving support payments nor deducted from gross income for the parent making payments. This is applicable for how many children are included in the support obligation. 

Spousal support has traditionally been taxed as income for the party receiving it and subtracted from the gross income of the person paying it.

4) Estimate tax payments and income

Unlike income from a job, when taxes are automatically deducted from your paycheck, alimony is paid to you in full, with no deductions for taxes. You’ll have to calculate the income tax of maintenance and possibly make quarterly tax payments. To calculate the amount and complete the documentation for these estimated payments, you might want to engage the services of a CPA. 

If you have a job, you’ll need to recalculate your anticipated income tax and see if your W-4 needs to be changed. The head of household payers has lower tax brackets than joint filers.

To avoid penalties for underpaid estimated taxes, you may need to withhold more tax by reducing the number of exemptions on your W-4 if you are the primary income earner.

5) Understand the current tax law

Get to know how the new tax law may affect your post-divorce tax implications.

Some sections in the bill could be changed. So, if you’re in the process of negotiating a divorce deal, take the time to understand how the law may affect your settlement agreement. After that, you can adjust your negotiations accordingly to save much money in taxes.

6) Get tax deductions for homeownership

Tax deductions for homeownership depend on who owns the house and how much is owed on the mortgage. So, if you and a partner share a mortgage, the deduction on your tax return should reflect your share of the costs. If your spouse contributes to the mortgage after the divorce, he is entitled to deductions in proportion to the amount they provide. 

Because of children, some couples will keep joint ownership and share mortgage payments even after the divorce. Deductions should be distributed 50/50 in this situation. The IRS typically grants the opportunity to claim the deduction to the party who can show that the payment was made from distinct sources.

It’s crucial to know who has the authority to claim the deduction and account for those payments appropriately. If you’re still in the middle of the divorce process, make sure your lawyer includes this in your divorce settlement agreement.

7) Make a claim for children as dependents

Another consideration in a divorce settlement agreement is who will be entitled to claim each child as a dependent. If the divorce settlement does not specify who is entitled to this exemption, the child’s custodial parent is allowed. If one spouse has a higher tax rate, this could make financial sense. 

You may be able to decrease your taxes by claiming the dependent exemption for your child. To do so, your divorce decree must name you as the custodial parent. In certain situations, the custodial parent may provide a conditional exemption to the non-custodial parent.

8) Divide the investments

If you’re still transferring assets following your final settlement agreement, make sure any retirement accounts you receive are tax-free. The total value of the assets and the related tax cost basis should be transferred to taxable accounts. Get better knowledge of your overall portfolio and the tax implications of changing your investing plan. 

As you plan for your future now that you are single, you should assess your asset allocation. You may need to have a strategy for liquidating assets over time to cover living expenses. These choices should be based on a thorough grasp of the tax implications, and be sure you fully grasp the tax implications before proceeding.

If your marital status changes, you may need to modify your tax filing status, such as single, head-of-household, married filing separately, or married filing jointly. Your file status affects your tax rate and the amount of the standard deduction you can claim.

There are specific rules in place. Seek help from a divorce lawyer if you don’t understand the filing status.

Lyle Solomon has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.