The end of a marriage is not only tragic, but it also leaves a number of logistical and financial problems in its wake. One of the issues that many separating couples may need to educate themselves about is how a divorce will change their tax burden. Here are four topics that might make the first year of tax-paying after divorce more complicated — and how to deal with them:
1. Filing as married or single depends on when you got divorced. You can continue to receive the tax benefit of filing jointly as a married couple only if you were still officially married for the entire tax year in question. For example, if you are in the process of a divorce that will be finalized in January of 2013, you and your spouse can still claim a married status on your taxes for 2012. If, on the other hand, your divorce is finalized in December 2012, then you will both have to file as single.
Filing as head of household is one possible way to avoid the marriage status conundrum and still save some money on April 15. In order to qualify for this status, you must file your return separately from your estranged spouse, you must have lived apart from your spouse for at least the last six months of the tax year, you must have paid over half of the cost of maintaining your primary residence, and you must be able to claim your child or children as your dependent.
2. Claiming children as dependents can be tricky. In the past, it was considered a given that the divorcing wife would get custody of the children, which meant that she also was entitled to claim them as dependents. However, when custody is split between parents, the tax implications can be a little difficult to puzzle through since the IRS does not have a crystal clear definition of custody in the case of joint-custodial parents.
In general, if the court has designated you as your child’s custodian, then you can claim them as dependents. However, if there is no court order, or if the parents have agreed to some sort of joint custody, the IRS considers the parent who has the physical custody of the kids for most of the year to be the custodial parent. This does not help parents who are splitting custody 50/50. Since both parents cannot legally claim the same dependent, there are a couple of options for divorcing parents with joint custody: 1. If you only have one child, you can switch off years which parent claims the child as a dependent. 2. If you have multiple children, you can split up which child is claimed by which parent. Both of these options are perfectly legal.
3. Alimony and taxes. If you are paying alimony to your ex-spouse, you will enjoy a lower tax bill, as alimony payments can be deducted. In fact, alimony does not even need to be itemized in order for you to take advantage of the deduction.
If you are receiving alimony from your ex, you need to know that this is considered to be taxable income, and it will affect how much you owe come tax time. You may need to either make estimated tax payments or increase your withholding at your job so that you are not hit with a large tax bill come tax time.
4. Child support and taxes. Child support, unlike alimony, is considered completely tax neutral. That means that the payer cannot take a deduction for it, and the recipient does not need to pay taxes on it. Some ex-spouses who are paying child support may attempt to classify child support payments as alimony in order to receive the tax benefit though. This is a situation that needs to be hammered out between both spouses so that the children are financially cared for without putting an undue burden on either parent’s finances.
The Bottom Line
Take the time to educate yourself on what to expect financially and tax-wise before your divorce is finalized. Even in the midst of an overwhelming experience, it pays to know what you will be facing.