Taxes and Divorce
One situation more confusing and frustrating than the divorce itself is having to file your taxes during the divorce. The four tax areas we most often get questioned about is the filing status, child tax exemptions, child support, and spousal support.
I will try and explain what you need to know about each. Please remember, we are Las Vegas divorce attorneys, not CPA’s. Be sure to talk to your tax expert before filing your taxes.
Filing Status
The date your divorce is final and your status as a custodial or non-custodial parent will affect these areas. The important date to pay attention to is December 31 of the tax year. How you file your tax return depends on your marital status at the end of this year. If you are divorced prior to midnight on December 31 of the tax year, you will file separately from your former spouse.
If you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree by the last day of your tax year, your filing status is considered “unmarried for the entire year”. The importance of filing separate returns is the “Head of Household” status. Head of Household status will typically receive more tax exemptions.
If you are not divorced or legally separated prior to December 31, you must file as “married separate” or “married joint”. People who file as “married joint” must work on their tax return together. Trying to file jointly with someone you are going through a divorce battle with can be challenging. Filing “married separate” will usually result in a larger tax liability or lower refund.
Child Exemption Credit
In 2015 the IRS allows you to deduct $4,000 from your gross income for every child. This is a nice tax credit. Who gets the exemption, you or your ex?
Your divorce decree may designate who will claim the children as exemptions on their tax return. If there is no specification about this, the exemption goes to the primary custodial parent. When there is joint custody, the child exemption goes to the parent who has the child the greatest number of days during the tax year.
Although the parent with primary custody of a child is entitled to claim exemption for that child there may be times to transfer the exemption. One example is when the custodial parent’s income or other tax deductions make it better to trade the exemption with the other parent.
Child Support & Alimony
The IRS looks at child support and alimony completely opposite when collecting taxes. The payer of child support cannot deduct this expense from their taxes and the receiver of child support does not claim the money as income. Child support is considered post-tax money.
The payer of alimony (aka spousal support) is allowed to deduct this expense from their taxes and the receiver does pay taxes on alimony received. Large distributions or personal property can often be labeled spousal support in the divorce decree. Be careful, because this could trigger a tax.
The final conclusion is, we are good divorce lawyers, not good tax advisers. We know enough about taxes to hurt ourselves. Make sure to contact your CPA before making any final decisions.
No Fooling With Divorce & Taxes
Taking all the aforesaid into consideration it should be noted that 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 another few issues to consider;
- 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 Las Vegas divorce attorneys is important.
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