Divorced but Living Together: How Taxes Are Affected

As societal norms evolve, more divorced couples are choosing to live under the same roof due to financial constraints or shared parenting responsibilities. This arrangement can significantly impact tax filings and financial planning. Understanding these effects is essential for optimizing financial outcomes.

Filing Status Selections

For divorced couples sharing a residence, selecting the appropriate filing status is a critical decision with tax implications. Post-divorce, the most likely options are “Single” or “Head of Household.” “Married Filing Jointly” and “Married Filing Separately” generally do not apply once the divorce is finalized.

“Single” status is straightforward but may not maximize tax savings. This status is available to those legally divorced by the last day of the tax year. However, if one individual provides more than half the cost of maintaining the home and has a qualifying dependent, they might qualify for “Head of Household” status, which offers a higher standard deduction and more favorable tax rates.

To claim “Head of Household,” specific criteria must be met, including maintaining a separate household for a dependent for more than half the year. This can be complex when both parents share a home, as the IRS requires evidence of separate living arrangements. Documentation such as utility bills or affidavits may be necessary.

Claiming Children as Dependents

Claiming children as dependents can be challenging for divorced couples living together. The IRS allows only one parent to claim a child, which affects tax credits and deductions. The custodial parent—defined as the one with whom the child resides for the majority of the year—typically has the right to claim the child. When custody is equally shared, parents may need to alternate claims annually or negotiate an agreement, which should be documented in writing.

The benefits of claiming a dependent extend beyond the Child Tax Credit. The parent claiming the child may also qualify for the Earned Income Tax Credit or Dependent Care Credit, which can offset childcare expenses. These benefits can significantly impact the claiming parent’s tax outcome.

Alimony and Support Payments

The Tax Cuts and Jobs Act of 2017 changed how alimony is treated for tax purposes. For divorces finalized after December 31, 2018, alimony payments are no longer deductible for the payer, nor are they taxable income for the recipient. This change requires careful planning, particularly for divorced couples residing together.

The loss of the alimony deduction can impact financial strategies and cash flow. Couples may consider structuring payments as child support, which remains non-taxable to the recipient. Clarity in agreements and proper documentation are essential to avoid misclassification and IRS scrutiny. Additionally, state-specific regulations on alimony may differ from federal rules and should be reviewed.

Coordinating Shared Expenses

Divorced couples living together must coordinate shared expenses to maintain financial stability. Clear agreements on managing household costs—such as mortgage payments, utilities, and groceries—are essential. Establishing a joint household account can simplify this process.

Documenting contributions toward shared expenses is crucial. Records, such as receipts and bank statements, help prevent conflicts and may be necessary for determining eligibility for tax deductions or credits. For example, the individual covering a larger share of household costs may be eligible to claim deductions, such as for mortgage interest or property taxes, provided they meet IRS requirements.

Ownership of Assets and Liabilities

When divorced couples cohabit, ownership and division of assets and liabilities require careful management to avoid unintended tax consequences. Divorce decrees typically outline these divisions, but continued use of shared assets or contributions to joint debts can blur boundaries.

For jointly owned assets, such as homes or investment accounts, clear agreements are necessary. For example, if one party covers all mortgage payments, they may claim the mortgage interest deduction if they itemize deductions. Similarly, income generated from a joint investment account must be reported appropriately on each individual’s tax return.

Joint liabilities, such as credit card debt or loans, also require attention. Payments on certain liabilities, like student loan interest, may qualify as deductions but only if the individual making the payment is legally obligated to do so.

State and Local Tax Considerations

State and local tax (SALT) laws add complexity for divorced couples living together, as these regulations often differ from federal rules. Residency definitions, for instance, may impact how income is taxed. If both individuals remain in the same home but file separately, determining state residency might require examining financial contributions and time spent in the household.

Property tax rules can also create challenges. Understanding how deductions or exemptions are applied to a jointly owned home is key. Some states offer homestead exemptions or property tax relief, but eligibility often depends on ownership, residency, or income thresholds.

State-level treatment of alimony, child support, and other financial arrangements may also vary. While federal law no longer taxes alimony for divorces finalized after 2018, some states still consider it taxable income for the recipient. Reviewing state-specific tax codes or consulting a local tax professional can help divorced couples navigate these distinctions effectively.