Divorce affects your tax situation in ways you may not expect, and at the same time, it has no impact in places where you might assume it would. Before filing your return—and ideally, before finalizing your divorce—there are some key tax issues you need to consider.
Alimony and Child Support are “Tax Neutral” Payments
Not long ago, a spouse who paid alimony got to take a tax deduction for that amount and the recipient had to declare it as income. Under current tax laws, alimony paid for a divorce decree entered after December 31, 2018, is not attributed as income or treated as a tax deduction.
Child support was never tax-deductible and that situation has not changed. However, in recognition of the fact that children are expensive to raise, the tax code does provide some tax breaks for parents, and these need to receive careful consideration before a divorce is finalized.
Only One Parent Can Claim the Child Tax Credits
While current tax laws no longer provide personal exemptions for dependent children, there are tax credits and other benefits available for parents. Parents cannot split these benefits for a single child, although if they have more than one child, one spouse can claim the tax credits for one while the other spouse takes the credits for the other.
Generally, the IRS expects the parent with custody to receive the tax credit. However, that parent may release the right and allow the other parent to take the credit, so long as:
- The custodial parent signs a Form 8332
- The parent claiming the benefit files that form with their return
- The custodial parent doesn’t “forget” and claims the benefit anyway
When one parent claims tax benefits for a child and another parent files a later return attempting to do the same, the IRS computers will usually reject that second return. Even if it is accepted, the error will be caught eventually. The IRS will not care whether the parties had an agreement about the tax credits, but only about the fact that the benefit has already been claimed. Therefore, it is wise to not only reach an agreement about child tax credits before your divorce is finalized but also to file your return early just in case your spouse forgets the arrangement.
Choose the Best Filing Status
If you are in the midst of a divorce or if this is your first year filing a return since your divorce, you may have choices in filing status that you’ve never considered before. If your divorce was not final by the last day of the year, then the IRS considers you still married for that tax year. You may file jointly with your ex, which can provide tax savings, or it may make more sense to file separately.
If you file a separate return, you may have the choice to file as “head of household” which gives you a better tax rate. To do so, you need to have a qualified dependent (such as a child who lives with you or a parent you provide support for). You must also have paid more than half the cost of maintaining your home and must be “unmarried,” meaning that you stopped living together before the final six months of the year.
Your Divorce Lawyer Can Help Prevent Problems at Tax Time
Divorcing couples often have many other tax issues to consider, such as allocating back taxes, property taxes, or capital gains taxes. Your divorce lawyer can help you reach an agreement on these issues as part of your divorce settlement. If your divorce is final and you still need help with these issues, it is worthwhile to find out how a divorce lawyer could negotiate a resolution.
At Family Law Solutions, P.C., we strive to help clients achieve their goals during and after divorce, including those associated with tax issues. To find out how we may be able to assist in your case, contact us to schedule a confidential consultation.