“Why didn’t they teach this in school?” is a common thought when it comes to filing personal income taxes. Taxes are often one of the most complex and least understood aspects of personal finance. For those recently divorced, the first year of filing separately from your former spouse can feel especially daunting. Despite the stress, with each passing year filing taxes will become much easier. To help you navigate this, we have compiled answers to some of the most frequently asked questions to ensure you start your tax season on the right foot.
Who Will Prepare My Return?
Hiring a Certified Public Accountant (CPA) is often more costly than self-filing but may be appropriate depending on the complexity of your tax return. For most people, it is worth paying to have your return professionally prepared, particularly with divorce. If you previously used a CPA for your joint return, in the year following a divorce, many choose to remain with the same professional due to their understanding of your unique tax situation. If you trust your CPA and they are comfortable working with you and your former spouse separately, there is no problem with continuing to work with them indefinitely. If you prefer to find a new CPA, your friends, financial professional, or attorney might have a good recommendation.
If you decide to find a new tax provider, make sure you give yourself as much time as possible before the new year begins. Most tax professionals will not take new clients in the months before tax deadlines when they are busiest. Many will want to see your most recent return to understand the complexity and provide a quote. Be sure to communicate, or ask your financial advisor, to help explain to your CPA what income sources and/or deductions will be different in the year following your divorce.
Do We Still File Together in the Year of the Divorce?
Marital Status: Your marital status on December 31st determines your filing status for that tax year. For example, if you finalized your divorce during 2024, your 2024 tax return (which is prepared during the calendar year 2025) will no longer be married filing jointly. The two options for non-married individuals are Single or Head of Household.
- Single: Unmarried individuals who do not support eligible dependents
- Head of Household: Unmarried individuals who pay more than half of household expenses, with either a qualified child or relative living with you for more than half of the tax year. A common example is a divorced parent providing majority of the financial resources for their dependent child’s care
Qualifying Child and Relatives: A qualified child must be under 19 or under 24 if a full-time student. A qualifying relative is someone who has gross income under a specific threshold. Because of the expenses associated with having a dependent, ‘Head of Household’ provides a larger standard deduction and wider tax brackets. If you are unsure which status is right for you, be sure to consult a tax professional to get the best guidance for your personal circumstances.
Will I Owe Taxes Due to My Divorce?
A divorce should not inherently generate taxes owed. During settlement, assets transferring between spouses is generally not a taxable event. Keep in mind, if assets are being liquidated to provide cash after the settlement, there could be tax implications that need to be reported on your return.
Additionally, if you had joint investment assets with your former spouse, there is often a primary account holder whose Social Security number is listed first on the account. The primary account holder will need to report that income on their return. Be sure to consult your Marital Settlement Agreement or divorce decree if there is any uncertainty on joint assets.
Child Support and Spousal Support
Child support is never taxable to the recipient, nor is it deductible for the paying parent. Similarly, spousal support is generally not taxable to the recipient, nor tax deductible for the payer (unless the divorce was finalized prior to 2019).
What are Estimated Payments, and Do I Need to Make Them?
Estimated Tax Payments are payments made to the government on income not subject to automatic withholding, like self-employment income, interest, dividends, or capital gains. These payments are made four times a year to help avoid a large tax bill at year and avoid potential underpayment penalties.
Tax Penalties are imposed for missed or insufficient payments to the IRS. To avoid penalties, you can calculate your safe harbor payment. You will need to pay at least 90% of the tax you owe for the current year or pay 110% of the previous year’s tax. Meeting one of these conditions ensures you won’t face penalties for underpayment, even if you end up owing more at the end of the year.
If you made estimated payments in the past, it could make sense to continue in the year after your divorce to ensure you do not receive an unexpected penalty.
How Are Taxes Calculated on my New Income Amount?
There are two main types of tax, each with different tax treatments:
Ordinary Income: This includes wage income (salary, tips, and bonuses), retirement account withdrawals, rent, royalties, unqualified dividends, and more. These are taxed across various “ordinary” income brackets.
Capital Gains: This includes profits (money made above the initial purchase price) on assets ‘capital’ in nature: including stocks, bonds, businesses, partnership shares, cars, and real estate. These are taxed at different (typically lower) rates than ordinary income.
Adding income sources together gives you your adjusted gross income (AGI), to which you apply the appropriate deductions to arrive at your taxable income.
Standard Deduction: This is an amount set each year by the IRS. It differs depending on your filing status and is the amount you can deduct from your taxable income if you do not itemize deductions on your return.
Itemized Deductions: Certain qualifying expenses may be bundled together, and if they exceed the standard deduction, you may itemize them to reduce taxable income even further. Examples include mortgage interest, property taxes, qualifying medical expenses, donations to charity, and more.
How are my investments taxed?
Long-term retirement savings fall into three tax categories:
Taxable Brokerage Accounts: These investment accounts are typically held individually, jointly, or in trust. Any interest and dividends that the underlying investments generate are taxable and must be reported. Sales of assets that made more than the purchase price are subjected to capital gains tax, and sales of assets that lost money from the initial purchase price bank capital losses that can be used to offset capital gains.
Tax Deferred Retirement Accounts: These include traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, and many more. Contributions are tax deductible, and interest and dividends are tax deferred, so they do not need to be reported annually. Withdrawing from these accounts typically incur taxes at ordinary income rates on the full distribution amount which can vastly reduce the net amount you receive. Please note, some states tax retirement account distributions, while others do not.
Roth Retirement Accounts: These include Roth IRAs or Roth 401(k)/403(b) accounts. Contributions are not tax deductible, but future earnings and growth are entirely free of tax. If you take money out of this account, you will have a Form 1099-R, but none of the distribution is taxable.
It is often most desirable to receive Roth assets in the divorce settlement, however, it is common to receive a mix of Roth, Taxable, and Tax Deferred accounts.
Early withdrawal penalties need to be considered! Retirement accounts impose 10% early withdrawal penalties before age 59 ½ unless you meet one of the IRS defined exceptions.
When splitting retirement plans, a Qualified Domestic Relations Order (QDRO) is a legal document that is used to facilitate the split. QDRO divisions are exempt from potential tax liabilities and the 10% early withdrawal penalty. IRAs do not require QDROs (as they are not qualified retirement plans) and are not exempt from 10% early withdrawal penalties.
What Documents Do I Need to Gather?
If a CPA prepares your return, they might have a checklist of important documents to gather. If not, your prior year’s return and your recent Marital Settlement Agreement or divorce decree can serve as a helpful guide to know what items to look for. Some of the most common items needed are:
- Form W2: If you are currently working, this shows employer income and withholdings.
- Form 1099: There are many types of 1099s. They can come from financial institutions such as banks or brokerage accounts, retirement plan rollovers, contract work, and more. If you had a QDRO prepared to split a retirement plan as part of the divorce, there is likely a 1099-R associated with the rollover. It can be helpful to review your balance sheet with a financial advisor to determine all sources of taxable income and ensure the tax forms are accounted for. Please note, if you closed accounts, these documents might not show up online. If you think you are missing a document, call the institution and inquire. While 1099s become available in February, it’s best to wait until March as the issuer usually posts corrections to earlier documents.
- Loan Information: Examples include mortgage interest, student loans, loans on your investment income, and home equity loans.
- Property Taxes: Can be deductible if you itemize your return (limited to $10,000 per year as of the Tax Cuts and Jobs Act of 2017).
- Medical Expenses: Can be deductible above a threshold if you itemize your return.
- Charitable Gifting Expenses: By cash or in-kind donations can be deductible if you itemize your return.
- Other Income Sources: Pension, Social Security, self-employment, rental income and more need to be reported as well.
What Are Some Best Practices When Reviewing My Return?
- Refer to Your Agreement: If you have children, confirm via your divorce decree or Marital Settlement Agreement which parent gets to claim the dependent tax credit. Is there a tax-loss carryforward to the current year? If from a joint source, consult your agreement on how this is split for the current tax year.
- Consider all your accounts: If you have opened new accounts, ensure these are accounted for in your tax documents. If your old joint accounts are still open, ensure the correct spouse is reporting the income.
- Update Bank Information: If you have opened new accounts post-divorce, you also want to ensure the proper bank account is set up to receive potential refunds or make payments.
- Max Out Contributions: If appropriate, consider making IRA contributions for the previous year. Taxpayers have until April 15th to make prior year contributions. Make sure to include Health Savings Account and 529 Plan contributions. Note: child and spousal support is not considered earned income.
- Ensure Liquidity: Be cognizant of how much cash you have on hand around tax time. With changes to your taxable situation post-divorce, it is possible you will owe the IRS money. It is ideal to have cash available to make these payments, so you are not forced to sell assets in short order. If you need to make cash available, it could make sense to consult with a financial advisor to determine the best asset to sell.
How Do I Set Myself Up for Success for Future Tax Years?
- Communicate: If you have major transactions during the year, it is best to consult with a CPA to avoid underpayment penalties. To avoid penalties, you may be required to make estimated payments each quarter.
- Stay Organized: Keep adequate records of tax statements and receipts. Your net worth statement is helpful to track your financial accounts and debts. It is best to keep key tax documents for at least three years after filing before deleting or shredding them.
- Stay Safe: Discard old information by shredding it. Never email sensitive information without security. Sensitive information includes financial account information, or personal identification information (including social security numbers and dates of birth).
It is completely normal to find taxes confusing, especially after a recent divorce. Whether you choose to prepare your taxes yourself or hire a professional, having a basic understanding of the process can make things much more efficient. Additionally, you may find this knowledge empowering as you embark on your next chapter.
What’s one small step you can take today to make progress on your tax filing?
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