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10 Income Tax Tips for Separated Couples

More Tax Tips for Separated Couples

tax planner with couple
More bad news: You can't deduct attorney's fees nor the cost of getting help with your taxes after a separation (if you were divorced before 2019, you still claim the latter as a tax deduction). AlexRaths/iStockphoto/ThinkStock

5: Forget about Taking a Deduction for Legal Fees – Probably

This one gets kind of complicated. A legal separation or pending divorce can rack up legal fees and court costs — neither of which are eligible for a tax deduction. It used to be that you could claim legal fees related to alimony or spousal support, because they were a part of producing or collecting income. You were entitled to claim that as one of your deductions, if the total of your itemized deductions exceeded 2 percent of adjusted gross income.

The 2017 tax law overhaul changed all that, starting in the 2019 tax year. For divorces that occur between 2019 and 2025, when the law expires, alimony is no longer considered taxable income or a deductible expense. That means you can't claim legal fees related to it. Nor can you claim fees for tax advice you sought related to the separation. However, the old rules still are in force if your divorce degree was issued prior to 2019 [sources: Bird, IRS]

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A separation or divorce has significant repercussions on other types of taxes, ranging from income tax to property tax, and your legal counsel can help you navigate the waters. Just be sure to get an itemized billing statement from your legal counsel so you can identify the reason for each charge [source: Wood].

4: Track Medical Bills and Expenses

If you've separated, but have children together, be sure to track their medical expenses — even if you are not the custodial parent who can claim them as dependents. You may still be able to deduct your children's medical expenses from your federal income taxes, as long as you are the one who is footing the bill.

You can even claim your child's medical expenses as a deduction if the other parent is the one who claims the child as a dependent. In that instance, each parent still can deduct whatever medical expenses that he or she actually paid [source: Perez].

Remember In order to be able to deduct medical expenses of any sort, your total for you and/or your child has to exceed 7.5 percent of your adjusted gross income [source: Perez].

If you are paying for all or a portion of your child's medical expenses, you can include them in your itemized medical expense deductions. There is a lengthy list of qualified medical expenses, so you'll want to consult with a tax professional or peruse IRS information. Some of the most applicable include dental treatment, eyeglasses, insurance premiums (including health, life, dismemberment and more) and prescription drugs [source: IRS].

3: Understand Innocent Spouse Relief

Did your estranged spouse underpay taxes or lie about assets on your last joint return? We're not saying it happened, but we're suggesting you should be prepared if the possibility exists. Otherwise, you may end up being equally liable for your partner's mistakes.

The best way to cover your assets is by understanding how Innocent Spouse Relief works. If you filed a joint return with a spouse who falsified income, and then you signed the return without suspecting any wrongdoing, you may qualify for Innocent Spouse Relief. This means you won't be held liable for unpaid taxes or anything else that may have been misrepresented.

There are other, more nuanced forms of Innocent Spouse Relief that could offer protection, even if you don't meet the traditional criteria. If you've been living apart from your spouse for a year before filing an Innocent Spouse Relief request, or if you are widowed, you may still qualify. There are additional protections for spouses who were under threat of domestic violence at the time the taxes were filed, too [source: IRS].

2: Don't Deduct Child Support

Child support is the term used for court-ordered payments to support a child or children age 18 or younger. When you have children and become legally separated, child support usually factors into the arrangement. If you are not legally separated, but informally estranged, you are not required to pay child support, although some parents opt to make voluntary payments. Although these voluntary payments won't count toward any future court-ordered child support payments, be sure to record the financial contributions you make.

Whatever the arrangement, money paid for child support is not tax deductible. For example, if Sarah pays $300 a month in child support during her separation from Ben, it is not an expense she can deduct from her income taxes. And, if she falls behind on child support payments, her tax refund could be garnished for child support.

On the other hand, Ben, who is receiving child support, does not have to claim the money as income. Because child support can't be claimed as income, it's not subject to taxation, either [source: Wall-Cyb].

1: Beware Capital Gains

There's only one home and there are two of you. Clearly, you can't both lay claim to the place if you're heading toward divorce, so why not sell it? For many couples, it's a solution worth exploring. There are, however, some tax traps ready to snap once the "sold" sign goes up in the front yard. Namely, the capital gains tax.

Capital gains tax is profit from the sale of a home. To figure the amount of capital gain, sale expenses, home improvements and the original purchase price are deducted from the sale proceeds. Anything left over is considered capital gain.

There is good news, though. While you are separated, but still married and planning to file joint taxes, you can potentially exclude up to $500,000 of capital gains if you've occupied it as a primary residence for two of the past five years. If you are filing separately, the amount becomes $250,000 per person. The $250,000 per person threshold stands if you receive the home in the divorce settlement and sell it at a later date [source: IRS].

If, for example, you purchased your home two years ago and are now selling it during your separation from your spouse, you will still reap some of the benefits of capital gains tax exclusion. The amount will depend on your particular circumstances, so be sure to contact a tax professional.

Last editorial update on Feb 28, 2020 04:27:28 pm.

Author's Note: 10 Income Tax Tips for Separated Couples

Taxes can be complicated. After all, the tax code changes every year and, frequently, so do our circumstances. When it comes to spousal separation and division of assets, it's important to know how seemingly simple decisions affect your finances.

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Sources

  • Bird, Beverly. "What Getting Divorced or Separated Means for Your 2020 Tax Return. " The Balance. Jan. 15, 2020. (Feb. 24, 2020) https://www.thebalance.com/what-divorced-or-separated-means-for-taxes-4125740
  • Cussen, Mark. "Divorcing? The Right Way to Split Retirement Funds." Investopedia. (Nov. 5, 2014) http://www.investopedia.com/articles/retirement/03/060403.asp
  • Cussen, Mark. "The Fundamentals of Spousal Support Taxation. " Investopedia. Oct. 29, 2019. (Feb. 24, 2020) https://www.investopedia.com/articles/tax/10/spousal-support-taxation.asp
  • El-Sibaie, Amir. "2019 Tax Brackets." (Feb. 24, 2020) https://taxfoundation.org/2019-tax-brackets/
  • IRS. "Don't Overlook the Child and Dependent Care Tax Credit." March 20, 2014. (Nov. 4, 2014) http://www.irs.gov/uac/Newsroom/Dont-Overlook-the-Child-and-Dependent-Care-Tax-Credit
  • IRS. "Publication 501 (2019), Dependents, Standard Deduction, and Filing Information. " Jan. 22, 2020. (Feb. 24, 2020) https://www.irs.gov/publications/p501#en_US_2019_publink1000220775
  • IRS. " Topic No. 205 Innocent Spouse Relief (Including Separation of Liability and Equitable Relief)." Feb. 12, 2020. (Feb. 24, 2020)https://www.irs.gov/taxtopics/tc205
  • IRS. "Topic No. 452: Alimony and Separate Maintenance." Feb. 14, 2020. (Feb. 24, 2020) https://www.irs.gov/taxtopics/tc452
  • IRS. Topic No. 502 Medical and Dental Expenses." Feb. 11, 2020. (Feb. 24, 2020) https://www.irs.gov/taxtopics/tc502
  • IRS. "Topic No. 602 Child and Dependent Care Credit." Feb. 13, 2020. (Feb. 24, 2020)https://www.irs.gov/taxtopics/tc602
  • Tax Credits for Working Families. "Child Tax Credit." (Feb. 24, 2020) http://www.taxcreditsforworkingfamilies.org/child-tax-credit/
  • Lino, Mark. "The Cost of Raising a Child." Feb. 18, 2020. (Feb. 24, 2020) https://www.usda.gov/media/blog/2017/01/13/cost-raising-child
  • Perez, William. "The Medical Expense Tax Deduction for Tax Year 2019." The Balance. Jan. 6, 2020. (Feb. 24, 2020) https://www.thebalance.com/medical-expense-tax-deduction-3192881
  • Perez, William. "The Rules for Alimony and Taxes in Tax Year 2019. " The Balance. Feb. 10, 2020. (Feb. 24, 2020) https://www.thebalance.com/alimony-and-taxes-3193082
  • Wall-Cyb, Teresa. "Alimony, Child Support and Taxes." Divorce Net. (Feb. 24, 2020) http://www.divorcenet.com/resources/divorce/divorce-taxation/child-support-alimony.htm
  • Wood, Robert. "The Only Good Legal Fees Are Tax Deductible Legal Fees." Forbes. Sept. 22, 2010. (Feb. 24, 2020) http://www.forbes.com/sites/robertwood/2010/09/22/the-only-good-legal-fees-are-tax-deductible-legal-fees/

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