Getting a divorce creates enormous changes in many areas of your life, so it's no surprise if you've never considered how your taxes would be affected. Unfortunately, failing to prepare for those tax consequences could result in a major shock when you fill out your next tax return. Some planning and some proactive steps can ease the tax consequences of your divorce and allow you to hang on to a little more of your hard-earned income.
A change in filing status
Before your divorce, you most likely used the "married filing jointly" filing status for your federal tax returns. Once you're divorced, you no longer have the option to file jointly; you'll need to use either the single or head-of-household filing status (depending on whether you have kids or other dependents living with you). Unfortunately, this change to filing status often results in a significantly higher tax bill -- especially if you were the primary breadwinner of the household.
For example, let's say you and your spouse together had an annual taxable income of $150,000, and $100,000 of that income was yours. Using the 2017 tax brackets, by filing jointly, you'd pay $28,977.50 in federal income taxes. That means you'll have paid just over 19% in taxes on that $150,000. If you make the same $100,000 in taxable income the year after your divorce and your filing status is now single, you'll pay $20,981.75 in federal taxes (again, using the 2017 brackets) -- almost 21% of your taxable income, not 19%.
Losing out on tax breaks
Getting a divorce can also disqualify you from claiming certain tax credits and deductions. For example, if you have kids and your spouse gets custody, not only do you lose the option of filing as head of household, but you also lose access to the Child Tax Credit and other dependent-related tax breaks, such as the credit for child and dependent care expenses. This can easily raise your tax bill by another few thousand dollars (the Child Tax Credit alone is worth $1,000 per child in taxes, and it may be going up in the near future).
Your change in filing status also changes your eligibility for many tax breaks. For example, the Savers Credit, which gives you a tax credit for contributing to retirement savings accounts, has an income limit in 2017 of $62,000 for married taxpayers filing jointly but only $31,000 for single filers (again, this is more of an issue if you made the bulk of the income during your marriage). Other tax breaks with income limits include the Earned Income Credit, the Premium Tax Credit, and (in some cases) even the deduction for IRA contributions.
Withholding goes awry
If you forget to correct your W-4 form after your divorce, your tax problems could grow worse, because your employer could now be withholding less money than they should be. That means you'll likely owe a lot of extra money to the IRS when you complete your tax return. So the first step you can take in preventing a post-divorce tax shock is to promptly fill out a new W-4 and give it to your HR representative. You may still end up paying more in taxes, but at least you'll only have to sacrifice a bit of money out of every paycheck, rather than being slapped with one enormous bill when you file your tax return.
Other post-divorce tax prep
Because you'll likely lose at least one or two tax breaks as a result of your new filing status, it's a good idea to find some new tax breaks to take their place. For example, if you moved to a smaller home after your divorce, you probably ended up with more stuff than you have room for -- so why not donate the excess items to a charity and take advantage of the charitable contribution deduction? Or if you decide to take some job-related courses so that you have a better shot at a promotion, by all means grab the Lifetime Learning Credit.
Even if you normally prepare your own tax returns, the first year after a divorce is a good time to hire a tax professional to do your return for you. A professional can spot tax breaks that you'd likely miss and help to minimize the tax consequences of your divorce. And tax preparation fees are deductible, so you're guaranteed to get one extra tax break from hiring a pro. Finally, a qualified tax preparer will be less likely to make errors on your return, which means you'll be less likely to have problems with the IRS a year or two down the road. That's one less thing to worry about as you start the next stage of your life.