There are many tax consequences related to divorces, both during the divorce proceedings and after the divorce is finalized. Some of the most common tax issues involving divorce arise out of filing status, exemptions, and alimony. Depending on circumstances surrounding the marriage and divorce, the tax adjustments may have a significant financial impact.
The tax issue that will affect nearly all divorces is filing status. While married, a couple may have filed “Married Filing Jointly” or “Married Filing Separately.” However, the filing status available during the year a person becomes divorced is limited to “Single” or “Head of Household.” A person is considered unmarried for the entire tax year if the final divorce decree is obtained before the last day of the year. The consequences that a “Single” filing status has on an unmarried person’s tax return arises from the newly applicable tax brackets, reduced standard deductions, and personal exemptions allowed. The effects of the new filing status are magnified even further if the marriage was a single income household.
A potential break from the worst consequences of the “Single” filing status is to file as a “Head of Household.” Filing as a “Head of Household” is attractive for unmarried people due to the potential tax benefits. The “Head of Household” filing status grants a higher standard deduction and more favorable tax brackets as opposed to “Single” filing status. The requirements for filing as “Head of Household” are that a person needs to: be unmarried or considered unmarried, pay for more than half of the costs of keeping a home, and have a dependent child or family member. Unlike the unmarried considerations above for the “Single” filing status, one can be considered unmarried under a “Head of Household” filing status if the unmarried person filed a separate return, paid for more than half of the costs for keeping up a home, did not live with their spouse in the same home for more than six months, provided the main home for the dependent child, and generally able to claim an exemption for the child.
The tax issue that will affect nearly all divorces is filing status.
As mentioned above, the exemptions eligible to be claimed differ depending on the filing status of the taxpayer. However, special rules exist for exemptions related to a qualifying child and qualifying relatives. A qualified relative generally is a person related to you who cannot be a qualifying child of anyone, makes under $4,050 of gross income, and whom you provide more than half of their support in the year. Generally, a qualifying child must live with the taxpayer more than half of the year, not provide more than half of their own support for the year, be under the age of 19 at the end of the year or under the age of 24 if a student, and the child is not filing a joint return.
Special rules exist for divorced parents claiming exemptions for qualifying children. Only one parent of a divorced couple can claim a qualifying child on a return. Generally, the qualifying child is claimed by the custodial parent. The custodial parent is the parent whom the qualifying child has lived with for the greater number of nights in the year. However, sometimes the noncustodial parent is allowed to claim the child for exemption purposes if certain requirements are met. To meet the requirements, the parents must: be divorced or live apart at all times for six months, provide more than half of child’s support for the year, child must be in one parent’s custody, and the custodial parent signed a waiver to allow the noncustodial parent to claim the child as a dependent for the year. If you are the noncustodial parent who could benefit from having this exemption, talk with your attorney about including terms in your divorce decree to award you this exemption.
Only one parent of a divorced couple can claim a qualifying child on a return.
Alimony payments carry special tax implications. Alimony payments are defined as payments made from one spouse to another if they are ordered by a divorce decree, a written separation agreement, or court order requiring a spouse to pay support payments to the other spouse. Additional general requirements for alimony payments are payments are made in cash, the spouses are not members of the same household, payments do not extend beyond the death of the receiving spouse, and the payments are not considered child support. Payments made to third parties on behalf of the receiving spouse can still be considered alimony payments if they meet the requirements above.
Alimony payments are generally tax deductible to the paying spouse, and must be reported as income on the receiving spouse’s tax return. However, an important alimony recapture rule exists for the front-loading of alimony payments during the first year. Alimony recapture disallows the tax deductibility of alimony payments for the paying spouse. Generally, alimony recapture exists when the payments for the third year are $15,000 less than the total alimony payments made during the second year. Additionally, if the amount paid during the second and third years is reduced significantly, then alimony recapture may apply. In calculating alimony paid for alimony recapture purposes, it is not necessary to include alimony payments made for more than three years which vary based on income or payments under temporary support orders. If you are receiving alimony pursuant to your divorce decree, remember that you must report these payments as income, or if you will be paying alimony as part of your divorce decree, ask your attorney to make sure you are able to deduct the alimony from your income tax return and that you will not be subject to the IRS recapture rules.
Alimony payments are generally tax deductible to the paying spouse.
Tax issues surrounding divorce can become complicated very easily. However, an attorney who is Board Certified in Family Law by the Texas Board of Legal Specialization can help manage the stress by properly planning for your financial future.