Are you considering
divorce? If so, there’s a lot on your mind. You’re probably concerned
about issues, such as
child support, asset division, marital debt, and what to do with the house. Taxes on
the other hand, may not be one of the first things on your mind –
they may not be on your mind at all, but during the marital settlement
process, they should be factored into the equation. After all, the last
thing you want is a tax surprise when it comes time to file your return.
Aside from child custody, much of divorce is about money. For some couples,
it’s all about money. Regardless of your individual circumstances, it’s important that
you understand the tax consequences of divorce. Read on as we explain
what you need to take into account tax-wise while you work out a
marital settlement agreement:
1. Spousal Support Paid
As long as
spousal support is a part of a legal separation instrument or a divorce decree, it is
tax deductible for the paying spouse. Voluntary payments paid outside
a separation instrument or divorce decree are not tax deductible. So,
if you are ordered to pay spousal support and you give your former spouse
extra cash to help them cover their rent, pay for college classes, or
repair their vehicle, you cannot deduct the extra money. Likewise, if
you are not ordered to pay spousal support but you give your former spouse
money out of the kindness of your heart, you cannot deduct because it’s
not in the divorce decree or separation instrument.
2. Spousal Support Received
For the receiving spouse, spousal support is counted as taxable income
just like their normal wages. In order to avoid a penalty, receiving spouses
withholding additional taxes from their regular wages or by making
estimated tax payments.
3. Child Support Paid
Unlike spousal support, child support paid is not tax deductible for the
4. Child Support Received
Custodial parents do not count child support as income for tax purposes.
5. Traditional IRAs
Did you contribute to your spouse’s traditional IRA? If so, you
cannot deduct those contributions. However, you may be able to deduct
any contributions you made to your traditional IRA.
6. Name Changes & Tax Refunds
After the divorce, are you planning on going back to your maiden name?
If so, don’t forget to notify the Social Security Administration
immediately and request a new Social Security Card. You’ll need
to file out a Form SS-5,
Application for a Social Security Card. If you forget to update the SSA’s records, a mismatch in your name
can delay your tax refund.
7. The Child Tax Credit
When parents are divorced, only one parent can claim the child tax credit,
with the exception of separated or divorced parents who lived part for
the last six months of the year. Under the IRS’s special rule, the
noncustodial parent is entitled to claim the child tax credit providing
the other requirements are met. In order to do this, the custodial parent
would have to sign a Form 83332,
Release of Claim to Exemption for Child of Divorced or Separated Parents, stating that he or she will not claim the child as a dependent for that
year, and the non-custodial parent would have to attach that form to his
or her tax return.
If your divorce agreement does not specify who claims the child tax credit,
the exemptions for your children will automatically go to the custodial
parent. “What if I have joint custody?” In that case, the
exemption will go to whichever parent has the children for the greater
number of days during the year.
8. Your Marital Status & Your Filing Status
It all depends on your marital status on December 31st. If you’re
divorced by December 31st, you will file your return separately from your
former spouse. If you have custody of the children and you receive child
support, you may qualify for the head of household status, which offers
favorable advantages. If you don’t qualify for head of household
status but you’re officially divorced, you file as a single taxpayer,
even if you were married for part of or even a majority of the tax year.
9. The Childcare Credit
If you’re going to be the custodial parent and you have to pay for
childcare so you can work, don’t forget to claim the childcare credit
if you are eligible. Keep in mind however, that the childcare credit is
not available to non-custodial parents; it is only available to custodial
parents. As of 2017, “The dollar limit on the amount of the expenses
you can use to figure the credit is $3,000 for the care of one qualifying
individual or $6,000 for two or more individuals,” according to the
10. Tax Advice May Be Deductible
While your divorce attorney’s legal fees are not tax deductible,
fees you paid for professional advice regarding the tax effects of your
divorce can help reduce your tax liability. For example, such advice can
be used as an itemized deduction on Schedule A of your tax return. Also,
ask your tax preparer or CPA about the fees incurred to obtain spousal
support because those may be tax deductible as well.
Are you contemplating a divorce? If so,
reach out to Claery & Hammond, LLP to schedule a free consultation with a caring member of our legal team.