Divorce and Filing Taxes

Warmer days, buds and blossoms are all signs that spring is here. And now that April is upon us, our thoughts also turn to tax season and the looming deadline this year of April 18th. Filing taxes can be tricky enough for married couples, but for couples that are separated or divorced, it can become even more complicated. Receiving alimony or dividing property and other assets through the divorce process are just some of the factors that can make taxes a stressful process. Here are a few questions to keep in mind when filing your taxes while being separated or after a divorce.

What’s your filing status?
One of the first steps to filing taxes is determining what your filing status will be for the year. If your divorce is finalized before December 31st, you are considered unmarried for the entire calendar year. In this case, you will file as single or head of household. For couples that do not finalize their divorce by the end of the tax year (December 31st), you may choose to file a joint return.

There are pros and cons for filing jointly, if it is an option. Typically, your tax burden is lowered with joint filing, depending on incomes, deductions, and credits. The main disadvantage is that you can be held responsible for your ex-spouse’s unpaid taxes. It’s important to take measures to protect both spouses if filing jointly. Your settlement agreement should address how you’ll deal with refunds or tax liabilities.

For those not eligible to file jointly, filing as head of household will typically result in a lower tax bill than if you file as single. This designation does have strict requirements and to qualify, you must:

  • Maintain a household for your child, even if you do not claim them as a dependent.
  • Be unmarried at the end of the year or living apart from your spouse for more than six months
  • Provide more than half the cost of maintaining the household
  • Be a U.S. citizen or resident alien for the entire tax year.

Who claims the children?
The custodial parent is entitled to the exemption for children. In some cases, the exemption can be given to the non-custodial parent by using the IRS Form 8332. Tax benefits for claiming dependents is significant: for each dependent, you can deduct $3,900 from your federal taxable income, resulting in reduced taxes. Therefore, some couples choose to alternate who gets to claim dependency from year to year.

Are child support payments and alimony payments considered taxable income?
Alimony payments are almost always taxable income for the recipient and are tax deductible for the payer. The IRS has strict rules regarding what qualifies as an alimony deduction. For example, if a couple continues to share a home after the divorce, alimony payments made during that time cannot be deducted. Also, the alimony payments deducted must be outlined in a written divorce agreement.

Child support payments are not considered taxable income for the parents receiving the support and won’t affect your taxes in any way. They are not tax deductible for the parent paying the support.

Although taxes may be the last thing you want to think about while going through a divorce, it’s crucial to ensure that you are taking advantage of any tax benefits available – and avoiding any liabilities.

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