Divorcing couples often wonder who claims the children on their taxes, and in what other ways divorce will affect their taxes. Questions may include which filing status to use after the divorce, and how payments for spousal maintenance and child support to an ex-spouse are treated for tax purposes. Also, inquiries about what happens to assets like the family residence are obviously frequently common.
Filing Status
Your marital status as of December 31 of each year controls your filing status for that year. If you filed divorce petition on December 7 but are still married as of December 31 you and your spouse may still file jointly. If you can’t file a joint return for the year because you’re divorced by year-end, you can file as a head of household which will provide the benefit of a larger standard deduction and more favorable tax brackets, provided you had a dependent living with you for more than half the year, and you paid for more than half of the maintenance for your home.
Tax Credits, Dependent, and Exemptions
The presence of dependents also obviously affects various tax breaks such as the child tax credit, the child and dependent care credit, and various education tax breaks. Determining properly how to use these in the case of divorce may require the assistance of a tax professional.
You can continue to claim your child as a dependent on your tax return if you are the custodial parent, i.e., your child lived with you for a longer period of time during the year than with your ex-spouse. Keep in mind that it’s possible for the non-custodial parent to claim the exemption for a dependent child if the custodial parent signs a waiver affirming that he or she won’t claim it. A child’s medical bills paid after the divorce may be included in your medical expense deduction even if your ex-spouse has custody of the child and claims the dependency exemption.
The parent that claims an exemption for a dependent may also claim the child credit (up to $1,000), the American Opportunity higher education credit (up to $2,500) or the Lifetime Learning higher education tax credit (up to $2,000). If you can’t claim the exemption, you can’t claim these credits. Also, you can continue to claim the child care credit for expenses to care for a child if you are the custodial parent of that child.
Spousal Maintenance (alimony) and child support
If you’re paying spousal maintenance, you may take a tax deduction for the payments, even if you don’t itemize your deductions. Remember that such payments must be made in cash and pursuant to a divorce decree. However, your ex-spouse must pay income tax on these amounts. Child support payments are treated differently as the obligor may not take a deduction and the obligee-recipient is not required to pay income tax.
Property Transfers
When a divorce settlement transfers property from one spouse to another, the recipient doesn’t pay tax on this transfer. Because the property’s tax basis shifts, you will pay capital gains tax on all appreciation before and after any later sale.
Sale of the Marital Home as Part of Divorce
A decision to sell the martial home may have capital-gains tax implications. Normally, a taxpayer may avoid tax on the first $250,000 of gain on the sale of the primary home if he owned the home and lived there at least two years out of the last five. Married couples filing jointly can exclude up to $500,000 as long as either one has owned the residence, and both used it as a primary home for at least two out of the last five years. So because a single seller only gets a $250,000 profit exemption from capital gains, couples may desire to sell the marital residence before the divorce is final so they can protect up to $500,000 in gains from taxation.
Sale of the Marital Home after Divorce
You and your ex-spouse can each exclude up to $250,000 of gain on your individual returns for sales after a divorce, provided the aforementioned ownership-and-use tests are met. Also, if the two-year tests haven’t been met, sales after a divorce may still qualify for a reduced exclusion. The amount excluded depends on the portion of the two-year period the home was owned and used.
Retirement Savings
The IRS considers cashing out of 401(k) plan to transfer money to your ex-spouse a taxable distribution, and will bill you for the payment of any tax. Enlisting a tax professional to draft a Qualified Domestic Relations Order (QDRO) will transfer to your ex-spouse the right to the funds, thus relieving you of any tax burden. A QDRO is unnecessary to transfer IRA funds, provided the transfer is clearly delineated in the divorce decree to insure that it’s not treated as a taxable distribution.
If you are a parent involved in a divorce proceeding and have questions about which spouse can take certain credits, deductions, and exemptions, or any other question about divorce and taxes, call the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
