No Fooling With Taxes & Divorce

Posted: 17 September, 2019

After a couple files for divorce, they need to consider the ways the divorce will affect their tax situation. Child custody, child support and alimony all have tax implications. Here are just a few issues to consider;

  • Couples who have filed for divorce but are still married on the last day of the year can choose to file “married jointly” or “married separately”.
  • Alimony is deductible to the person who pays it and must be claimed as income by the party who receives it. Some criteria for claiming it as income and deducting it as an expense include; the payment cannot be designated as child support, and the spouses may not be living in the same household.
  • As a general rule, child support is not considered income by the recipient spouse nor is it deductible by the paying spouse.
  • Property divisions are considered tax-free exchanges and, as a general rule, will not be taxed.
  • When retirement accounts are transferred from one party to the other under a Qualified Domestic Relations Order (QDRO), they are also considered an exchange of property and are not taxed.
  • The parent who claims the children as dependents may also claim the child tax credit. This applies to children under the age of 17 for whom the taxpayer paid at least 50 percent of living expenses.
  • Who receives the tax credit should be detailed in the divorce decree. Absent specific wording, the IRS gives the dependent exemption and child tax credit to the parent that keeps the child for the most number of nights.
  • There are several factors that affect how valuable the tax credit will be. Each parents’ tax bracket needs to be considered as well as the number and ages of the children involved. A custodial parent may sign an IRS Form 8332 giving the non-custodial parent the right to claim the dependent exemption.
  • Both parties are liable for any tax owed when they file their taxes jointly. If income is under reported or not reported, the IRS can initiate collection proceedings against both parties even if they are now divorced.
  • On occasion, it is discovered that one party filed jointly without the knowledge of the other party. Coordination with the other spouse or between the representing attorneys is important.