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Tax Effects of Divorce

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Are you considering divorce? If so, there’s a lot on your mind. You’re probably concerned about issues, such as child custody, 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 should consider 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 non-custodial parent.

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 IRS.

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.

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