During and after a divorce, tax matters take on new importance since your financial circumstances have probably changed, as has your filing status. If you were in charge of tax returns during your marriage — and especially if you were not — keep these tips in mind to support the best possible outcome when filing your annual returns.
Some legal fees are deductible.
While most court costs and legal fees for obtaining a divorce are not deductible, some are, including:
- Fees paid for tax advice related to a divorce
- Fees paid to determine or collect spousal maintenance
- Fees paid to determine estate tax consequences of a property settlement
- Fees paid to professionals if the services were completed to verify the accurate amount of tax or to assist in obtaining spousal maintenance (appraiser, actuary, etc.)
These deductible costs are usually claimed as a miscellaneous itemized deduction on Schedule A of your income tax forms, but are subject to the 2 percent of adjusted gross income floor. Talk to your tax advisor to see if you qualify.
You may be held liable for past unfiled joint tax returns or audited returns.
Even if you were not involved in the preparation of your taxes during your marriage, you may still be held liable for unfiled returns or inaccurate returns. You can request copies of past federal and Minnesota state tax returns from your tax advisor or from the IRS and Minnesota Department of Revenue (Federal Form 4506-T and Minnesota Form M100).
Plan ahead for filing of future tax returns.
Your marital status on December 31 of a calendar year determines your filing status for that year. If you were married most of the year, but your divorce is finalized on December 31, you cannot file as married joint, but would instead file as either head of household or single.
If you are in the process of getting divorced, consider working with your spouse, your attorney and a tax professional to determine which filing status would best suit your financial situation. Also, keep in mind during the divorce process that it helps to spell out the following in the divorce decree:
- Who will itemize mortgage interest, real estate tax, charitable contributions and other itemized deductions?
- Who will claim any dependent children’s exemption and tax credit?
- Who will take any long-term capital loss carryover?
- Who will claim any quarterly estimated tax payments made during the year?
- Who will report investment income from joint accounts?
If this is not clearly spelled out in your divorce decree, consult with your tax professional or attorney for guidance.
Review your tax situation to determine withholding, estimated tax payments, cost basis of assets and taxable retirement benefit distributions.
Your W-4 withholding may need adjustment after your divorce to ensure that enough tax is deducted from your wages — or less tax, depending on your situation. You should also determine if you need to make additional estimated quarterly tax payments to cover spousal maintenance or personal investment income (which does not have taxes withheld like wages).
You’ll need to know the cost basis of your personal investments, real estate and any life insurance with a cash value. If you sell these assets in the future, the cost basis will determine if you have taxable income from the sale.
Finally, if you take a distribution from a retirement account during the divorce process, you may have to pay taxes on that income.
Plan ahead for your taxes during the divorce process and prior to filing that first post-divorce return. You’ll reduce the time, cost and potential frustration of this necessary part of your new life.