Divorce is a time of major change and upheaval, and given everything else that's likely going on in your life, you may not have given much thought to the tax consequences. However, it's important to be aware of these four ways your taxes will change as a result of divorce so you can prepare well in advance.
1. Filing status
The IRS considers you unmarried for the year if your divorce, annulment, or separate maintenance decree was finalized by the last day of the year. So when you file your taxes for that year, you can no longer use either "married filing jointly" or "married filing separately" as your filing status. If you have kids or other dependents living with you, you may qualify to use the "head of household" filing status; otherwise, you'll have to file as "single." In either case, you'll be using a different set of tax brackets than you did during your marriage.
If you got an annulment rather than a divorce, things get a bit more complicated tax-wise. An annulment basically means that you were never married in the first place, which means you have to file amended returns for all the open tax returns from past years to change your filing status. In most cases, that will mean refiling three years' worth of tax returns.
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2. Dependents
Once you and your ex are no longer living together, only one of you can claim the dependent exemption for your children. For most taxpayers, the dependent exemption is the equivalent of a $4,050 deduction per dependent, so if you have several kids this can be a major tax break.
By default, the custodial parent (the one with whom the child lives for most of the year) gets to claim the dependent exemption. If your divorce settlement says that the other parent should get the exemption, you and your ex will need to fill out Form 8332, and the noncustodial parent should include it in his or her tax return for the year.
Form 8332 doesn't allow you to list any conditions included in the divorce settlement -- for example, that the noncustodial parent has to pay child support in order to claim the exemption. However, if the noncustodial parent doesn't hold up his or her end of the bargain, the other parent can use Form 8332 to revoke the original form. If you do this, be sure to give written notice of the change to your ex in a timely fashion.
3. Alimony
Alimony payments get special tax treatment. If you pay alimony, you can deduct it on your Form 1040 (you don't need to itemize deductions to claim it). If you receive alimony, you'll need to report it as income (also on Form 1040) and pay taxes on it.
Not all divorce-related payments are considered alimony. Alimony has to be paid as cash (checks and money orders are considered cash for this purpose) and has to be a payment required by the divorce or separation agreement. Also, child support doesn't qualify as alimony for tax purposes. Child support is neither deducted by the payer nor taxed for the recipient.
4. Assorted tax breaks
Like the dependent exemption, most of the tax breaks you claimed on your joint returns can only go to one person once you're divorced. For example, only one parent will be able to claim the child tax credit for the kids. And if you owned your home jointly with your ex, whoever got the house in the divorce will also get the mortgage interest deduction.
If your tax situation was fairly complicated during your marriage, it can get even more so once you're divorced. In that case, you'd be wise to consult a professional tax advisor at least for the first year after your marriage ends so you can be sure that you've prepared your tax return correctly. When you're already dealing with the fallout from a divorce, the last thing you need in your life is an IRS audit!
