When two people are filing for divorce, the last thing on their mind is taxes. Divorces are already highly stressful events, and the tax confusion doesn’t make it any easier. Some of the tax issues that will arise include deciding what status to file under, paying taxes on alimony, deciding which parent gets to file any children as dependents, and so on. Understanding these issues are the best way to ensure you and your soon to be ex-spouse reach a fair agreement.
Understand Filing Status
Your filing status depends on your marital status on the last day of the tax year. So, if you are still married and living together on December 31st at midnight, you must file either as “married filing jointly” or “married filing separately.” If you are considered legally separated, or you have not lived together for at least 6 months of the year, you must file as “single” or “head of household.” This also applies if you were married for part of the year, but divorced before December 31st. Typically, the custodial parent of a couple’s children is who files as “head of household.”
“Head of household” and “married filing jointly” filers will typically pay lower taxes than those filing as “single” and “married filing separately.” So, if you’re presently going through a divorce, you should try to file as “married filing jointly” so that you both can save some money while you still can.
Understanding The Tax Implications Of Child Support And Alimony
Child support cannot be deducted by the person paying it, and the spouse receiving it is not required to pay taxes on it.
Alimony, on the other hand, is tax deductible by the spouse paying it. The spouse receiving alimony must treat it as taxable income as well.
If a couple decides to combine alimony and child support into what’s called “family support,” the monthly payment is tax deductible for the spouse paying it, while the spouse receiving it must pay taxes on it.
Understanding Which Parent Can Claim Children As A Tax Exemption
Unless the divorce decree states otherwise, the child tax exemption goes to the custodial parent. If parents have joint custody, the parent who has the child the highest number of days in the tax year is eligible to claim the exemption.
If you are the custodial parent of a child under the age of 13, and you incur work-related child care costs, it can be claimed as a tax credit. This is only applicable to the custodial parent, however.