Taxes are unavoidable. As Benjamin Franklin candidly put it “In this world nothing can be said to be certain, except death and taxes.” For some, divorce may be just as inevitable, but it can also bring a host of complications to tax filing. The following are a few issues that should be taken under consideration as the final month of tax season approaches if you are involved in a divorce this time of year.
1. Determine Your Filing Status A person’s status at the end of the year determines how they will file their tax return, however, absent an order of the court, there is no obligation to file jointly with a soon to be ex-spouse if you find yourself caught up the middle of a divorce. Married filing separately is almost always an option, but may result in a higher tax liability. If your ex-spouse has concealed income in previous years, it may make sense to file separately if the divorce is contentious and is not likely to settle. It is also important to be mindful that if there is a liability or refund, there may be duties or obligations associated with how it is divided at the end of the divorce process.
If a divorce is final by December 31 of the tax year, a tax payer will file separately from the former spouse for that tax year. Likewise, the custodial parent of the children may qualify for the favorable head of household status. If not, then single will be the default filing status, even if married for part of the tax year.
2. Consider the Tax Implications of Support Child support is not deductible to the person who pays it, but alimony is. Likewise, child support isn’t reported as income, but the recipient of alimony must claim it his or her tax return. The court however has the power, and parties can agree to designate support as “unallocated” or “family support” so that the tax treatment can be modified to accommodate the need(s) of the parties. This support structure allows spouses to take support payments that are typically not tax deductible and allows the payer to deduct the payments from his or her income taxes.
While alimony has always been treated this way, child support is usually not tax deductible. Unallocated support allows a taxpayer to merge child support and alimony together so that the payment of both becomes a tax deduction to the payer, and taxable income to the recipient.
3. Review Your Divorce Decree to See Who Will Claim the Children as Exemptions A properly drafted divorce agreement will contain provisions regarding the right to take the children as tax exemptions. If the agreement is silent then the right to take the exemption will go to the custodial parent. If the custody arrangement is joint, the exemption will go to the party who has the child the greatest number of days during the tax year. More often than not, a divorcing couple will alternate years or use some other method to equitably share the minor children as tax exemptions, but the terms of the separation agreement will always control.
4. IRS Form 8332 – Don’t Overlook It If the non-custodial parent has the right to claim the child(ren) as a tax exemption, the IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) should be signed by the custodial parent. A copy of this form ought to be filed with the income tax return in order to claim the tax exemptions for children who do not live the non-custodial parent. As a practical matter, this form is frequently neglected at tax time but care should be taken to make sure it is not disregarded.
5. File First if Exemptions are an Issue It is not uncommon for an argument about tax exemptions to surface before tax time even arrives. The custodial parent will always have an edge if they are able to file first since the IRS will make the non-custodial parent prove that he or she was entitled to the take the exemption.
6. Itemize your Statement of Legal Fees Paid During your Divorce Although the IRS prohibits any deduction for the cost of personal advice, counseling and legal action in a divorce, fees paid for tax advice about the consequences of your divorce may be taken as an itemized deduction on Schedule A on the line “other expenses”. Likewise, legal fees incurred to obtain alimony support order can be claimed as well. Carefully review the bill from your lawyer to see what, if anything, can be deducted.
7. Consider Changing Your Withholding on Form W-4 or Making Estimated Tax Payments Divorce can affect a tax situation dramatically and have consequences that carry over into future years despite even the best tax advice. If there is going to be a tax liability for the foreseeable future, it may be wise to claim one additional exemption for approximately every $3,600 of deductions, including alimony payments. In the case of an alimony recipient, consider requesting extra tax withholding in order to cover any new tax liability. If withholding won’t be enough to cover make up the difference, set up quarterly estimated tax payments to avoid owing taxes and penalties at the end of the coming year.
Wright Family Law Group 