How to File Taxes after a Divorce in Indiana

• Steps for filing taxes in Indiana after a divorce
• How to determine your tax filing status after divorce
• Custodial parent designation
• Child support, alimony, and implications on taxes in Indiana
• Division of assets
• Tax credits
• Legal fees and settlements
• Change of name
• Different ways to file your taxes after a divorce in Indiana
• References

Your tax-filing status is likely to change the year your divorce is finalized in Indiana unless you remarry that same year. You may qualify for some tax credits and deductions you didn’t previously get, depending on your circumstances. That said, getting divorced often has a net negative impact on a person’s tax burden. 

After divorce, much of the general process for filing taxes in Indiana remains the same. However, if you had a name change, make sure the name under which you file matches your Social Security card.

Steps for filing taxes in Indiana after a divorce

Divorce brings on great changes in your life, but the process of filing your taxes after divorce isn’t one of them. Like every year, you will collect important forms, including W-2s from employers, 1099 forms for other income, and 1098 forms for mortgage interest deductions. If you’re completely new to filing your taxes, the IRS has a guide to help you get started.

Prepare your records and identification

As you work on your taxes, keep basic information at hand, such as your Social Security number and any relevant identification numbers for dependents you intend to claim. The government uses this information to link your tax documentation to you and your dependents, so it’s vital to get it all correct.

Make sure you have records proving you are eligible for any tax credits or deductions you claim. For example, you should be able to prove any education expenses you paid or charitable donations you made, assuming you plan to claim relevant credits or deductions.

Many people can file their taxes for free or at a low cost using tools provided by the IRS. You can also pay for tax software from a reputable company or talk with a tax professional and have them help.

How to determine your tax filing status after divorce

Unless you remarry in the same year your divorce was finalized, your filing will change after divorce. It will likely change from married to single. In some cases, it will change from married to head of household. The latter status, head of household, is typically a more beneficial status, tax-wise.

Keep in mind that your divorce must be finalized in the year before your status changes. So, if it’s the month of April and you’re technically married but going through the divorce process, you should file as married.

A person may be the head of their household if they have at least one dependent in their care and pay the majority of their household’s expenses. The IRS offers a free tool to help taxpayers determine their filing status. 

Custodial parent designation

If divorced, only one parent can claim a child as their dependent. By default, this is the right of the custodial parent. A custodial parent is the parent with whom a child stays more nights of the year. While important, this designation isn’t the only factor to be aware of.

Because claiming a child as a dependent can have significant tax benefits, and because many divorced parents spend significant time with their child even though they’re not the “custodial” parent, some settlements dictate different rules as to who may claim a child as a dependent. For example, parents might agree to alternate the years in which they claim a child as their dependent. 

Child support, alimony, and tax implications in Indiana

Child support payments aren’t tax-deductible for the payer, and they aren’t taxable income for the receiver. 

Spousal support (alimony) may have tax implications, although it’s important to understand the basics of the Tax Cuts and Jobs Act of 2017 (TCJA) to know for sure. This law changed the tax code by setting a cutoff date of January 1, 2019. Divorces and similar agreements finalized before that date fall under the old rules. Divorces finalized on or after that date fall under the new rules. 

Under the old rules, receiving alimony was akin to receiving taxable income, and paying it was tax deductible. But under the new rules, this isn’t the case. An individual who receives alimony isn’t considered to be receiving taxable income. Furthermore, the payer of alimony can’t deduct these payments from their taxes.

It’s possible for an older divorce to be modified so the new rules apply. If you’re unsure which rules apply to you, speak with a legal or financial professional.

Division of assets

Broadly, the division of assets that occurs during a divorce doesn’t have any direct tax implications. While it will likely change your financial situation in other ways, you aren’t receiving or losing income. A major exception is if assets are sold as part of the divorce process. If this occurrs, you may have to claim capital gains in that year. 

One of the most common sources of major capital gains for divorcing parties is the sale of a family home. The good news is, many people qualify for a major tax exclusion on the sale of their home. Specifically, they may exclude up to $250,000 individually or $500,000 if married filing jointly from their total gains from the sale. This can result in substantial tax savings.

To qualify for this tax exclusion, most people must satisfy residence, ownership, and look-back requirements. But exceptions exist, as do rules for partial exclusions, even if you don’t fully qualify. 

The standard requirements for a maximum exclusion are as follows:

• You owned the home for at least 24 months out of the last five years.
• You owned the home and used it as your residence for at least 24 months of the previous five years.
• You didn't sell another home in the two-year period before the date of sale.

Tax credits

The tax credits available to someone after a divorce can vary by situation. Some common tax credits that may be available to you include the Child Tax Credit and Earned Income Tax Credit. If you’re a head of household, you will also generally benefit from a higher standard deduction. Make sure to read up on the rules of any particular deduction you think might apply to you.

A common error divorced parties make is claiming a child as a dependent when they actually qualify as a non-custodial parent. As discussed earlier, even if you care for your child relatively regularly, you will usually need primary custody over your child to claim them as a dependent (although sometimes divorce orders or settlements may set this differently). In a given tax year, only one parent should claim a child as their dependent. 

If you are paying health insurance premiums after a divorce, you might also be eligible for a Premium Tax Credit. To find out if you qualify, the IRS has a tool where you can answer several questions to check. The process takes about 15 minutes.

Legal fees and settlements

With the TCJA, legal fees incurred during a divorce are rarely tax-deductible. However, there are some exceptions, mostly related to business. 

Fees paid to legal and financial professionals whose services are needed as part of performing ordinary business are often tax-deductible. And sometimes, those services intersect with changes that occur as a result of divorce. Fees paid to similar professionals to help with business taxes, including getting advice and having tax documentation prepared and filed, also tend to be tax-deductible. 

However, most legal fees aren’t tax deductible. This includes fees paid to have a legal professional represent you in a divorce-related legal battle. 

The services of a professional might be tax-deductible in some cases, but certainly not always. This is something you should discuss with them. Ideally, you would be billed for these two service classifications separately so it’s easy for you to prove how much of what you paid is tax-deductible. 

Change of name

To avoid issues with the IRS and similar organizations, make sure the name on your tax documents matches your Social Security card before filing your taxes. Divorce can be emotional and confusing, and it’s easy to lose track of important details. If your name changes as part of the divorce process, update the relevant paperwork to reflect that.

Different ways to file your taxes after a divorce in Indiana

In Indiana, like most states, a person can e-file their taxes or mail them in. Increasingly, most people e-file. Indiana provides a helpful collection of links and guide materials to make that process easier.

Indiana also allows citizens to mail their tax forms. The Department of Revenue has a guide on where to send your forms so they get to the right entities. 

References