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10 Income Tax Tips for Separated Couples

couple looking sad
A separation is often a confusing time for couples … and that includes changing tax situations. Ridofranz/iStockphoto/ThinkStock

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It started out as happily ever after, but after a while the weight of daily life — unchanged toilet paper rolls, time-sucking commutes, unresolved injuries — began to crush your once-blissful couplehood. Frustrated, but not ready to call it quits, separating seemed like a natural solution.

You both know there are still many questions to be answered, except for one that became abundantly clear: Adjusting to this new normal would take time and work. You both discovered that disentangling a marriage is a complex and nuanced process that was taxing you to the limit. And then came the actual taxes.

Should you file together or separately? Who can — and who should — claim the children, the childcare or the new braces? What about pet expenses? Should you sell the house and split the profit? The truth is, dissolving a marriage can be taxing. But then again, so are taxes.

Understanding which tax moves could work in your best interest, and which could be all wrong for your situation, is an essential part of unraveling your relationship while remaining in good standing with the U.S. government.

10: Weigh Your Filing Options

You are estranged from your spouse and now it's time to file federal income taxes. Whether you are legally separated or are living apart informally, you can still prepare a joint return. You can even do it if you've actually filed for divorce, as long as the divorce isn't final as of Dec. 31 of the tax year [source: Bird].

However, just because you can file a joint tax return doesn't mean you should. The standard deduction for a married couple, $24,400 for the 2019 tax year, is exactly twice what a single person would pay. So, there's no real advantage, unless one of you earns a lot more than the other or doesn't work at all. That would enable you to take most or all of the $24,400 against one person's income [source: Bird].

You also could file as single and the head of a household, which entitles you to an $18,350 deduction, provided that you paid more than half the cost of keeping your home for the tax year, and your home was the main home of a child who is your dependent [source: IRS].

There's also a downside to filing jointly, which is that you're liable for any taxes that your former partner owes but doesn't pay [source: Bird].

9: Transfer Retirement Assets, Tax-free

A retirement account may not seem like a top priority during a separation, but if you don't fully understand the tax consequences of transferring assets, it can become a costly problem.

As part of your separation, some of your retirement earnings may go to your spouse (or vice versa). Failing to use the correct process could have significant tax implications. Take Jane, for example. She has been the primary earner most of the marriage, so she opted to give her estranged husband George 50 percent of her 401(k) so he could embark on a financially independent life.

Jane should have made the transfer using a qualified domestic relations order (QDRO), which would have allowed her to transfer or rollover the funds tax-free. Because she did not use a QDRO, the Internal Revenue Service taxed the distribution, leaving Jane with a hefty tax bill and an early withdrawal penalty.

Using a QDRO to arrange for the transfer of 401(k) or 403(b) retirement assets from one spouse to another allows tax-free access to the funds and avoids early withdrawal penalties. Similarly, to transfer or rollover retirement funds from an IRA, you'll need to make a "transfer incident to divorce," which offers the same tax benefits [source: Cussen].

8: Don't Double Up on the Child Tax Credit

Children are a joy, especially when it comes to claiming a Child Tax Credit.

A Child Tax Credit can shave as much as $2,000 per child off your tax bill. If you and your estranged spouse are filing separately, you'll need to decide who will claim your child as a dependent. This determination will impact potential tax credits.

Only the parent who claims a qualifying child as a dependent will be eligible for a Child Tax Credit. To qualify for a Child Tax Credit, you must have provided at least half the child's support during the tax year and the child must have lived with you more than half of the tax year. Additional criteria must be met in order to qualify for a Child Tax Credit, which take into account a child's age, citizenship and relationship to a parent, so it may be in your best interest to consult a tax adviser.

Even if you meet all the criteria for a Child Tax Credit, you may earn too much money to receive it. A parent whose modified adjusted gross income is more than $200,000 typically won't qualify [source: Josephson].

7: Claim Child and Dependent Care Tax Credit

What if you aren't the spouse who gets to claim your child as a dependent and, therefore, potentially receive a Child Tax Credit? You can still get the credit you're due. Namely, a Child and Dependent Care Tax Credit as long as you meet certain criteria.

To qualify, your child needs to have been younger than 13 during the tax year, and you need to have paid someone else to take care of your child so you could work or go to school full-time. The Child and Dependent Care Tax Credit also may apply if you needed childcare to conduct a job search or if you have a dependent of any age with a physical or mental disability.

The amount of Child and Dependent Care Tax Credit you receive is based on the number of children you have and the cost of childcare. The tax credit could be up to $3,000 for one child or $6,000 for two or more children, so it pays to investigate the possibilities [source: IRS].

6: Don't Count on Being Able to Deduct Alimony or Child Support

If you've entered into a separation from your spouse, odds are the term "alimony" has been bantered around. Alimony is money paid to a spouse (or former spouse. It used to be that if you were paying alimony, it was a given that you could deduct it from your taxes, while your ex-spouse had to report it as income.

However, since the passage of the 2017 overhaul of the tax system, alimony is no longer deductible for people who get divorced between 2019 and 2025, when portions of the law expire. But people who got divorced before passage of the law can still treat it as a tax deduction or as taxable income, depending upon which of them is receiving and which is paying [sources: Perez, IRS]].

Additionally, if you've split with a partner and have a child, neither the person paying child support or the person who receives the support gets a tax deduction from it. But if you're a payer, make sure that you keep up with your payments. Not only is it the responsible thing to do, but if you don't, you could lose some or all of whatever tax refund you get, since the both the IRS and state governments have the power to garnish it to cover overdue child support payments [source: Cussen].

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