A divorce affects various aspects of your life, including your finances. In Pennsylvania, the financial implications of divorce extend to your tax situation.
Understanding how divorce affects your taxes helps you make informed decisions during an already challenging time. Here are some important things to know about the impact a divorce has on your taxes.
Before your divorce, you likely filed as either “married filing jointly” or “married filing separately.” After divorce, your filing status changes to “single” or “head of household” if you have dependents. This can impact your tax rates and deductions, with research showing that single women pay between $500,000 and $1 million more in taxes over their lifetimes than married women.
Alimony and child support
Alimony can be a significant financial aspect of divorce. For the recipient, alimony is taxable income, while the payer claims it as a deduction. Child support, on the other hand, does not affect taxes. Neither the recipient nor the payer includes it on their tax returns.
Selling or transferring assets like a house, investments or retirement accounts can trigger capital gains tax or other tax consequences. Planning carefully for these transactions helps minimize your tax liability.
Child tax credits
If you have children, you must determine which parent will claim them as dependents. Generally, the custodial parent does so, allowing that parent to qualify for child-related tax credits, such as the Child Tax Credit and the Earned Income Tax Credit.
Credits and deductions
Your eligibility for other tax credits and deductions may also change post-divorce. For instance, deductions related to homeownership and mortgage interest may shift if you sold your home as part of the divorce settlement.
Seeking guidance from a tax professional or financial advisor may help you navigate the complexities of divorce and taxation to ensure you make good choices for your financial future.