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8 Ways Getting a Divorce Can Change Your Taxes

Oct 1, 2021 | Divorce

United States tax codes treat married and unmarried taxpayers quite differently. This means you will see tax changes after getting a divorce, particularly in how you file and the return you receive (if applicable). Residents of Houston, TX, must also make certain updates so the IRS understands your new circumstances. It may seem you have a lot of work to do, but an experienced legal team can help guide you in the right direction.

8 Ways Getting a Divorce Can Change Your Taxes in Houston, TX

1. Alter Your Filing Status

Once divorced, you must choose one of two tax filing statuses: single or head of household. A single filer is unmarried and does not pay the majority of care costs for a dependent. A head of household is also a single filer, but they do pay most of a dependent’s care costs. When we say most of the costs, we mean at least 51%.

If you expect to care for your children or child after the divorce, it’s prudent you ask your tax preparer about filing as the head of household (HOH). This status receives preferential tax treatment, especially at lower income levels, and can keep more money in your pocket. To illustrate, the HOH typically pays a lower tax rate than a single filer and qualifies more easily for specific tax credits or deductions.

2. Place You in a New Tax Rate

A divorce automatically changes your income limits for the federal tax brackets, meaning you’ll likely pay a new tax rate. Income limits are higher for joint filers than those with other filing statuses.

Here’s what this ultimately means: if you earn more money than your spouse, you may pay more taxes following the divorce. On the other hand, if you earn less than your spouse, your income may place you into a lower bracket or keep you in the same one as when you were married. Income brackets also change depending on if you file as single or the head of household.

A Simple Scenario

Let’s say you earn $50,000 annually and your spouse earns $100,000. In filing a joint return, your combined incomes placed you in a marginal tax rate of 22%. In changing your filing status to single, your income keeps you in the 22% tax bracket. Your spouse, on the other hand, has a new marginal tax rate of 24%, meaning they’ll pay more taxes than when the two of you were married.

3. Potentially Qualify You for More Tax Credits

This depends on several different elements, including the specifics of your divorce and your income, but you may qualify for more tax credits after your divorce. Keep in mind, however, that you may no longer receive all the tax credits you earned as part of a married couple.

Much of your tax credit qualifications are based on who has custody of the children. If you do not have custody, you and your ex-spouse will need to determine who claims the tax credits available to you. Few people know this, but it’s perfectly legal for a noncustodial parent to claim credits as long as the other parent signs a waiver known as Form 8332. This form must accompany the noncustodial parent’s tax return each year the credits are claimed.

Specific Credits

Four tax credits are available to filers with dependents, including:

  • The earned income tax credit (EITC)
  • The child and dependent care credit
  • The credit for other dependents (ODC)
  • The child tax credit (CTC)

The EITC is available to taxpayers who have dependents and meet specific income thresholds. It is designed to help lower-income filers. Likewise, the child and dependent care credit refunds expenses to parents who must pay for child care while they work. The ODC applies to anyone who qualifies as your legal dependent, such as an elderly parent, while the CTC is available to both single and HOH filers who have underage children and income up to $200,000.

4. Allow You to Deduct Children’s Medical Expenses

Even if your ex-spouse has custody, you can include your children’s healthcare bills in your medical-expense deductions if you continue to pay for those costs. For instance, if you pay for your daughter’s braces, those costs should be given to your tax preparer. Medical expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income, but paying for your children’s healthcare needs may push you over that threshold.


5. Demand You Claim Certain Asset Transfers

A recipient does not pay tax on property shifted from one spouse to another as the result of a divorce settlement. But if you receive property or assets that you later sell, you will owe capital gains tax on all the appreciation before as well as after the transfer.
You should therefore consider the tax implications of the property before it’s divided. A bank account with $100,000 in it may seem equal in value to a $100,000 stock portfolio with a basis of $50,000. But the bank account is tax-free, whereas tax will be owed on the $50,000 stock profit when you sell it.


6. Require an Update to Your W-4

After getting a divorce, you must update your W-4 with your employer. The W-4 indicates how much tax needs to be withheld from your paychecks. If you don’t update changes relative to your filing status and dependents, your employer will continue to withhold money based on your former joint income level. This can cause you to under- or over-pay your tax responsibility and will impact your finances throughout the year.

As long as you’re making updates, you’ll also need to inform the IRS that your legal name has changed. This can be done using Form SS-5, Application for a Social Security Card, through the Social Security Administration. If your Houston, TX, address changed as a result of your divorce, you’ll need to complete Form 8822 with the IRS.

7. Force You to File First

If you’re worried about what your ex-spouse might claim on their taxes after the divorce, you may want to file first to prevent them from:
  • Falsely claiming a child as their dependent
  • Claiming certain expenses as their own
  • Attempting to file a joint return with you listed as their spouse
  • Trying to claim your refund as their own

It might be hard to imagine someone you were married to performing these acts, but they do happen. Sometimes they’re done in complete innocence, as an ex-spouse doesn’t understand how getting a divorce changes their personal tax situation. In any event, if your spouse does make these mistakes, you may be eligible for innocent spouse relief with the IRS.

8. Still Hold You Responsible for Unpaid Taxes

Your divorce decree should consider all marital assets and debts, including unpaid taxes owed to the IRS or the state of Texas. It’s best to pay joint back taxes with marital assets to avoid retaining this debt after the divorce. But if payment in full is not possible, ensure tax debts are provided for in the divorce settlement. Keep in mind you and your ex-spouse remain jointly responsible for unpaid taxes until they’re satisfied in full.

A divorce changes almost everything about a person’s finances, including how their taxes are filed. Understanding the many implications you face as a single person can be challenging. That’s why we’re here – to answer your questions and help you find hope on the other side. Schedule a consultation with our highly qualified team by contacting Skillern Law, PLLC, today.