Divorce and Taxes: What You Need to Know

Way across the pond in England, a not entirely festive holiday was observed by many in the legal community shortly after New Year’s Day. This unofficial holiday is National Divorce Day and it is Jan. 3 or 4, depending on who you ask. In America, January often is thought of as “Divorce Month,” with some saying there are twice as many divorce filings in January as in other months.

This January in particular might see even more couples splitting because the rebounding economy could make it possible for them to be able to afford a divorce. In addition to the legal bills, the long-term costs of life after divorce can be very expensive; not having someone to split the mortgage and other household costs with might be just the beginning of the additional costs you will encounter.

Understanding how a big change like a divorce will affect your taxes can help you prepare. To start, make sure you know the answers to all of the following questions. They might seem “easy” at first glance, but don’t be so sure…

Are you really single?

Your marital status on Dec. 31 of the year you are filing tax returns for is a determinant in your filing status. This means taxpayers who are not divorced on that date must continue to use one of the filing statuses for married couples, which are married filing jointly and married filing separately.

“If your divorce isn’t final, you may or may not wish to file a joint return. Often the decision about this comes down to what your divorce lawyer advises,” said Jackie Perlman, principal tax research analyst at The Tax Institute at H&R Block.

Being divorced could qualify you to file as head of household if you also meet these two conditions:

  • Paid more than half the cost of keeping up your home
  • Had a qualifying dependent living in your home more than half of the year.

Divorced taxpayers who do not qualify to use the head of household status will generally file as single.

What is your name and where do you live?

Depending on where you are now in the divorce process, your name and/or address could’ve changed, which could make it difficult for you to be found. While such anonymity might feel like a welcome respite, you want the IRS to be able to find you because it does not send junk mail.

After a name change, remember to request a new Social Security card with the new name. Your name on your tax return must match what the Social Security Administration has on file. If it doesn’t, it could take much longer to process your tax return and delay the issuance of a tax refund.

What are the tax implications of alimony?

Alimony reform is a hot topic in some states, with the focus primarily on how long the payments must be made. Whether you will be the one writing the alimony checks or cashing them, make sure you understand the terms of your divorce settlement agreement.

As far as your taxes go, alimony is taxable and deductible. The payer may claim the payments as an above-the-line tax deduction, which means it can be deducted by taxpayers who don’t itemize and still reduce taxable income. The recipient must claim alimony as taxable income. For some recipients, it is beneficial to adjust the amount of withholding on their W-4 to help avoid having to pay all the taxes resulting from the alimony payments at one time. Making quarterly estimated tax payments is another option.

Are custodial parents always the ones who claim children as dependents?

In most cases, the custodial parent (the parent the child spends more nights with) will claim the children as their dependents. However, noncustodial parents can claim children as their dependents with the proper written consent of the custodial parent.

“If you are the noncustodial parent – and regardless of what your divorce decree says – special rules apply to claiming your child’s dependency exemption,” Perlman said. “In most instances, the custodial parent must give you a completed Form 8332 releasing your child’s exemption to you. You must attach this form to your return.”

If the custodial parent releases the exemptions, the noncustodial parent would also claim the Child Tax Credit for children who are under 17. The custodial parent, if eligible, would claim the Earned Income Tax Credit, the Child Care Credit and file as head of household.

What are the tax implications of child support?

Child support isn’t tax-deductible for the payer, and child support isn’t considered income for the recipient and therefore should not be reported on income tax returns.

Is there any protection if you suspect your spouse incorrectly reported their income?

Divorce, separation and remarriage can often prompt people to review their tax history and sometimes seek relief. These are the types of protection the IRS provides for eligible spouses:

  • If one spouse owes back taxes or has other past-due obligations (e.g., child support) for which the IRS can hold back some or all of a joint tax refund, the other spouse can request injured spouse relief
    • When injured spouse relief is granted, the injured spouse may be able to get their portion of a tax refund, while their spouse’s portion would offset the past-due debts
    • Married taxpayers who suspect a past joint tax return may have understated income and tax without their knowledge may seek relief from joint tax liability by requesting innocent spouse relief. This relief is available in these three categories, each with its own set of qualifications:
      • Innocent spouse relief
      • Separation of liability
      • Equitable relief – a recent change has removed the two-year time limit for requesting this specific type of relief, which the IRS says is often sought by people who faced difficult or intimidating situations, such as domestic abuse.

When big changes – good, bad, happy and sad – happen in life there are often big tax changes to consider. To make sure you understand your tax outlook and are able to make sound financial decisions, consider meeting with a tax professional to discuss your individual situation.

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