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When you are ready for the rings to come off, taxes are probably low on your list of things to worry about. With that being said, financial impacts of divorce carry serious consequences for the separating couple and their children. As a law firm who handles both family law and bankruptcy, we have seen the negative outcomes of splitting couples’ failures to establish a plan for tax season. As a result, determining your tax situation should be higher on your list of priorities. By taking your taxes into consideration early on in your divorce will help you prepare and prevent future issues that may affect your finances.
No matter if this is your first time filing as a newly single adult, or your first time filing taxes at all, there are a few things you should be aware of when it comes to owing Uncle Sam.
How to determine your tax filing status?
The first step in filing taxes while in the midst of a divorce or after a divorce is determining your tax filing status. Your tax filing status is determined by the last day of the tax year in which you are filing. For example, if you are still married on Dec. 31, then you are considered married for the entire year. Likewise, if you are divorced on Dec. 31, then the IRS considers you divorced for the entire year.
According to the IRS, there are five tax filing statuses:
- Single: Normally this status is for taxpayers who aren’t married, or who are divorced or legally separated under state law. Note, Texas does not recognize legal separation.
- Married Filing Jointly: If taxpayers are married, they can file a joint tax return. If a spouse died in during the tax year, the widowed spouse can often file a joint return for that year.
- Married Filing Separately: A married couple can choose to file two separate tax returns. This may benefit them if it results in less tax owed than if they file a joint tax return. Taxpayers may want to prepare their taxes both ways before they choose. They can also use this status if each wants to be responsible only for their own tax.
- Head of Household: In most cases, this status applies to a taxpayer who is not married, but there are some special rules. For example, the taxpayer must have paid more than half the cost of keeping up a home for themselves and a qualifying person. Don’t choose this status by mistake. Be sure to check all the rules.
- Qualifying Widow(er) with Dependent Child: This status may apply to a taxpayer if their spouse died within two years of the tax year in which they are filing and have a dependent child. Other conditions also apply.
If you are still married on Dec. 31, you and your spouse will need to figure out how you will file taxes. Keep in mind, whether you are filing married jointly or married separately, you may share in any responsibility for any taxes due during the marriage, along with related penalties and interest, and you may be required to share any tax return.
Who claims the children as dependents?
Claiming a child on taxes is frequently a contentious topic between parents who are no longer together. This is why establishing the custodial parent or coming to a fair agreement before the tax season is necessary. Because taxes are federal law, your divorce decree may be silent on the issue.
The IRS allows only one parent to claim a child as a dependent. Under the IRS rules, the custodial parent, or the parent who has the child a majority of the time, may claim the child as a dependent.
“If your former spouse later claims the child as a dependent, and you are legally entitled to the dependent status, the IRS could make him, or her, prove their entitlement,” explains Savannah Stroud, Family Law attorney at The Carlson Law Firm.
When can I file as head of household?
After a divorce, there are major benefits that come with filing as head of household as compared to filing as single. For example, a head of household tax filing carries a higher standard deduction, makes a filer eligible for some valuable tax credits and a lower tax rate.
However, you can only file for head of household if:
- You’re divorce is final as of Dec. 31 of the year you’re filing the tax return.
- You paid at least half the cost of keeping up a home during the year you are filing.
- A qualifying person lived with you for at least half the year or who meets other specific requirements. Qualifying person examples include children attending school away from home; married children you claim as dependents; or qualifying parents you support and claim as dependents even if they don’t live with you.
Qualifying children after a divorce
A child can only be claimed as a dependent by one parent. As a result, it is especially important to note that after a divorce, you and your ex cannot both file as head of household based on shared support or care for the same child or children. In fact, children count as qualifying persons only for the custodial parent. If your divorce decree does not address tax arrangements and both parents shared equal time with the child, the parent whose adjusted gross income is higher can claim the child for purposes of filing as head of household. However, most divorce decrees will establish the custodial parent—the parent the child lives with a majority of the time. Generally, the child is the qualifying child of the custodial parent.
To meet the qualifying child requirements, the child:
- Must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
- Must be a) under age 19 by Dec. 31 and younger than you, b) under age 24 at the end of age 24 by Dec. 31, a student and younger than you, or c) any age if permanently and totally disabled.
- Lived with you for six months or more.
- Did not provide more than half of their own support for the year.
- Is not filing a joint return for the year. (Unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.)
If your child or dependent does not meet these requirements, the IRS does not consider them a qualifying child.
When can a noncustodial parent claim a qualifying child?
In some cases, for example, if a child spends equal nights at each parents’ home, then the court may include in their divorce decree that the parents may alternate years claiming a qualifying child. However, in most cases, noncustodial parents can’t use the child or children to claim head-of-household status, earned income or dependent care credits. Regardless if the custodial parent releases the right to claim the child by signing IRS Form 8332, there is no exception for head-of-household status.
Changes to claiming children on taxes
In December 2017, the Tax Cuts and Jobs Act signed into law eliminated the dependency exemption which allowed taxpayers to deduct up to $4,050 from taxable income. Effective since Jan. 1, 2018, the exemption won’t be available again until Jan. 1, 2026. Instead, the new law increases child tax credits available for the parent who may claim the child as a dependent.
What is the difference between an exemption and a credit? A tax exemption directly reduces your taxable income. On the hand, a credit reduces your tax liability.
What is the child tax credit?
The child tax credit is a credit that offsets the taxes you owe dollar for dollar. This credit is available if you have a child younger than age 17 at the end of the year that child lived with you for at least half of the year. Under the new tax code, the child tax credit increased from $1,000 to $2,000. However, up to $1,400 of the child tax credit is refundable.
You may only claim the child tax credit if you are eligible to claim the child as a dependent. Accordingly, for a non-custodial parent to receive this benefit, the custodial parent must agree and assign that right (via Tax Form 8332) to the non-custodial parent in the years they will be permitted to claim a dependent child in their tax filing.
Tax credits available to the parent with primary custody, or non-custodial parents with a Tax Form 8332 include the following:
- Earned income tax credit (EITC). You don’t need a child to claim the earned income tax credit, however, the credit’s value increases depending on how many qualifying children you have. The EITC is a refundable tax credit, which means it can lead to a tax refund—even if you had no tax withheld.
- Child Tax Credit and Additional Child Tax Credit. The Child Tax credit is worth up to $2,000 for each qualifying child and up to $1,400 may be refundable. The 2017 tax reform also temporarily provides for a $500 nonrefundable credit for qualifying dependents other than children.
- Child and Dependent Care Credit. This credit can help offset the cost of childcare while you work or look for work.
- Adoption Credit. You may be able to claim the nonrefundable Adoption Credit to offset the costs related to the adoption.
What other child-related expenses can I use to lower my tax bill?
If you continue to pay a child’s medical expenses once the divorce is final, you may be eligible to include the medical costs in your medical expense deduction even if your former spouse is the custodial parent and claims the child as a dependent.
Changes to alimony and child support
There has been much confusion around whether or not alimony and child support are deductible under the new tax laws.
In the past, alimony payments were deductible and the recipient had to declare the amount received as a taxable income. This is no longer the case under the new tax law. If your divorce is final after Jan. 1 2019 or after alimony payments are no longer deductible. This will be an expensive change for anyone required to make alimony payments. A qualified divorce attorney can help you carefully negotiate your divorce if it looks like you will be paying alimony.
According to the IRS, the following are necessary to qualify a payment as alimony:
- The spouses don’t file jointly
- Payments are in cash (including checks and money orders)
- Payments to a spouse or former spouse are under a divorce or separation agreement
- The divorce or separation doesn’t designate the payment as not alimony
- Spouses aren’t members of the same household at the time of payment (This applies to legally separated spouses under a decree of divorce or of separate maintenance.)
- There’s no liability to make the payment in cash or property after the death of the recipient spouse
- The payment isn’t child support or other property settlement
Reporting alimony received on taxes
If you are the alimony recipient, the new law no longer requires you to include payments in taxable income.
Ex-spouses may modify an earlier divorce agreement to adopt the new rule after it goes into effect in 2019. But it is important to note that both spouses must agree to a modification.
How does child support affect taxes?
Legally-mandated child supported payments has no tax consequences for either person. The IRS largely considers child support to operate outside of the bounds of taxes. No matter if you are the recipient of child support or the person legally mandated to pay, you do not report child support on your taxes. For example, if you pay child support, you just report your income normally and don’t decrease your income by the amount of your support payments.
Savannah Stroud, family law attorney, recommends you always file your taxes early and if you have specific questions to consult a CPA or tax attorney.
How The Carlson Law Firm Can Help
There are many aspects involved in filing for divorce. Divorce is a process that is best accomplished with the assistance of a knowledgeable attorney from our firm. We understand that divorce is a difficult and complicated situation, which is why we are available to help.
Contact The Carlson Law Firm today for a free, no-obligation case evaluation.