Divorce and Taxes: What You Need To Know

There are so many financial implications to divorce including tax obligations. Work with expert divorce attorneys and financial professionals to plan ahead and make thoughtful choices about your money.

by Ginita Wall, CPA, CFP®, CDFA™

Ginita Wall Divorce Financial advice San Diego 858-472-4022

Ginita Wall

 

Divorce is difficult enough. What could add to the anxiety that divorce brings? Taxes. If you are one of the many people who recently divorced, this year, as a result you will be

coping with new tax issues, and may even be filing your own tax return for the first time. Here are ten tips to help you handle tax issues now that you are divorced.

  1. Determine your filing status. Your marital status at the end of the year determines how you file your tax return. If you were divorced by midnight on December 31 of the tax year, you will file separately from your former spouse. If you are the custodial parent for your children, you may qualify for the favorable head of household status. If not, then you will file as a single taxpayer, even if you were married for part of the tax year. If you aren’t sure what would be better, you can ask your tax professional to project your taxes both ways to see.
  2. Consider the tax implications of support. Child support is not deductible to the person who pays it, but alimony is. Likewise, the recipient of alimony must claim it on her tax return, but child support isn’t reported as income. If you rolled your support together into “family support” in your agreement, that makes it fully taxable to the recipient and deductible to the payer, just like alimony. That often saves income taxes, though, because more income moves from the payer’s higher tax bracket to the recipient’s lower tax bracket, so there’s more after-tax income for them to split.
  3. Don’t run afoul of the special rules regarding support. If alimony payments are concentrated in the first year of two after divorce, the IRS may consider the money to be non-deductible property settlement. And if alimony is scheduled to end within six months of a child’s 18th or 21st birthday, the IRS may consider the alimony, in reality, to be disguised child support. Be sure you consult with a knowledgeable tax professional or attorney to review the support portion of your divorce agreement before you sign it.

    The status of child custody and child support could affect your taxes.

  4. Review your divorce decree to see who will claim the children as exemptions. If your divorce agreement does not specify who claims the children as exemptions, then the exemption for your kids goes to the custodial parent. If you have joint custody, the exemption goes to the parent who has the child the greatest number of days during the tax year. You can modify this by making a different provision in your divorce agreement. Again, if you aren’t certain where the exemptions would do the most good, on your tax return or your soon-to-be-ex’s return, see a tax professional and find out.
  5. Get signed Form 8332 if required. If you are entitled to claim the tax exemption for children who spend less than six months of the year living with you, then you will need your ex-spouse to sign IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents). A copy of this form must be filed with your income tax return for you to claim the tax exemptions for children not living with you. If you are to claim the children year after year, your ex can sign a Form 8332 that grants you the ability to claim them as long as they are eligible dependents.
  6. File first if exemptions are an issue. If you are entitled to claim the children on your return, but you think your ex may try to claim them instead, file early in the year. That way, since you’ve already claimed the children, the IRS will make your ex prove he or she was entitled to the exemption. It’s rare that this type of disagreement arises after a collaborative divorce, since you make the decision together who should claim them. 
  7. Claim the child care credit if you are eligible. If you are the custodial parent and you incur work-related child care for children under the age of 13, you may be able to claim a credit for a portion of the cost. Unlike the exemption, which can be assigned using IRS Form 8332, the child care credit is available only to the custodial parent.
  8. Review legal fees paid during your divorce. Although most legal fees are not tax-deductible, fees you paid for advice concerning the tax consequences of your divorce can be taken as an itemized deduction on Schedule A of your tax return, as can fees incurred to obtain alimony. Other fees, such as the cost of preparing a new title for your rental property, can be added to the tax basis of your assets.
  9. If you are employed, change your withholding on Form W-4. You can claim one additional exemption for every $4,050 of deductions, including alimony payments. If you are receiving alimony, consider asking to have extra tax withheld from your paycheck to cover your new tax liability. If you don’t, you should make estimated tax payments (see #10).
  10. Make estimated tax payments if withholding isn’t enough. If your withholding won’t be enough to cover your taxes for the coming year, set up quarterly estimated tax payments so that you won’t owe taxes and underpayment penalties at the end of the coming year.

Divorce may not be as inevitable as taxes, but it certainly brings complications to tax filing. Follow these ten tips, and the process should go smoothly in the future.

 

Claiming ‘Head of Household’ Status, Dependent Children During Divorce

by Alex Kwoka, Attorney at Law, Law Office of Alexandra M. Kwoka

If you are considering separating or divorcing,  and/or moving from the marital home with a child or children, thinking about how you will file your tax return is important.

First:  When will you separate into two households?

If you move out after June 30 in the tax filing year, you will not be able to claim either “Head of Household” or “Single” tax status, which means your tax rate may be greater than when you were married if you filed jointly.

IRS regulations permit parents who are not yet divorced or separated under a Judgment to file as Head of Household (if they meIRS 1040 Tax Formet certain requirements).

HH status is  a benefit to a parent, because filing as HH generally results in taxation at rates lower than “Married filing separately” or Single.

To file as Head of Household, at least one child must live with the taxpayer. The taxpayer must “maintain the household” by paying for housing, utilities and food.  The household must also be “the principal place of abode” of the child, which means the child must live with the parent for more than half the year according to IRS Regulations.

Because of this, be cautious in describing your custody arrangement if you are thinking of sharing custody of a child or children. If you are planning on being the Head of Household, as a parent  you may need to prove that you maintained a household for a child AND had approximately 51 percent of custody time. If you and your spouse share time equally or 50/50 you may not be able to qualify for HH status.

Even if there is no Court order determining custody, if you and your spouse are NOT living together for the last six months of the year, and you maintain a household for a child or children, you may qualify for HH status AND a child care credit if you file a separate return and meet the other requirements.

California law permits a taxpayer to claim a “joint custody Head of Household credit” if parties have lived separately for an entire year, AND a child lives with a parent no less than 146 days and no more than 219 under a written agreement or a Judgment or order. The law may be different in another state.

Second:  Who will claim your child or children as dependents?

IRS Regulations permit parents who have elected to separate or divorce (and taken steps to separate/divorce by moving to separate households) to not only claim one of several tax status when tax returns are filed, but also to decide who will claim a child or children as a dependent.

Claiming a child as a dependent means you claim a “dependency deduction,” also called a  “dependency exemption.”

The deduction/exemption means that the amount of the dependency exemption is deducted from your income. It reduces gross income in the calculation to arrive at taxable income.

In tax year 2013, the eligible dependency exemption is $3,900 unless a taxpayer is subject to Alternative Minimum Tax; or the deduction is reduced because his/her adjusted gross income exceeds $300,000 on a joint return, $275,000 on a HH return, $250,000 on a single return, or $150,000 on a married filing single return.

This means if you are a taxpayer in the 28% bracket in 2013, a $3,900 exemption is worth $1,092.

To claim a child as a dependent:

  • The child must be under 19 as of 12/31 of the tax year OR be a full-time student under the age of 24.
  • The child must be a dependent – i.e., live with the parent for more than one-half of the tax year.
  • The parent must provide support for the child.

If a child lives with both parents, or one parent is the parent with physical custody  under a decree, order or Judgment but both parents claim the child as a “dependent,” the IRS determines who is the “custodial parent” by looking for proof.  The IRS will determine which parent was the one with whom the child resides for the greater number of nights during the calendar year.

A parent with custody can “release” a dependency exemption for one or more children to the other parent by signing and filing  IRS Form 8332. It permits a custodial parent to release the exemption for one year, for several and/or future years, and to revoke the release. The non-custodial parent can then claim the child as a dependent by attaching the signed form to his or her tax return.  IRS Form 8332 explains the rules for children of divorced or separated parents, and is available online.

The Child Care Credit

If a parent can claim a child as his/her dependent and if the parent has child care costs for this child (who must be under age 13) IRS Regulations also permit the parent to claim a child care credit if he/she is the custodial parent.

But a non-custodial parent  to whom a dependency exemption has been released can NOT claim on her/his federal tax return a child care credit.  The custodial parent alone may claim the child care credit.

The amount of the child care credit depends on the claiming taxpayer’s income.  And, expenses which can be claimed are capped: $3,000 for one child; $6,000 for two or more children.

Because these rules and conforming with them to the satisfaction of the IRS can be complex and involve a significant amount of tax savings, it is wise to consult your tax professional if you have any questions or concerns.