Divorce is a very unfortunate ending to what once was a happy marriage. It is estimated that almost half of all marriages end in divorce, and when children are involved, it can get complicated. Although this is a very emotional time for a person to endure, having an attorney by your side to keep ensure you make wise decisions that emotions may confuse.
One main issue that many couples sometimes forget to take into consideration during a divorce is taxes. We never like to think about taxes on a normal day, but during a divorce… we really don’t want to worry about taxes. But we must.
Filing Status
When filing your taxes, you are asked your marital status. This is your status at the end of the previous tax year (December 31). If you were still married at the time, but in the process of divorce, there are several options for you to choose. You and your spouse may file Married, Married filing Separate, or Head of Household.
During a divorce, people tend to act in ways they normally wouldn’t. If you and your spouse choose to file jointly, you must know exactly what your spouse filed. It is not advisable to blindly sign a tax return with hopes that your spouse was honest about the income and property. The “innocent spouse rule” is rarely accepted by the IRS as a defense that you did not realize what the other party filed.
Depending on your income, property owned, and other variables, there can be great benefits or consequences to how you choose to file, and consulting a certified tax specialist will be able to properly advise you.
Alimony and Child Support
There are many decisions that need to be made during a divorce or a child custody case. The property needs to be split, possessions divided, and most importantly, the child time-sharing arrangements and child support. When determining who the custodial parent is, and how much child support and/or alimony will be paid, this is when people need to be aware of the tax laws.
If it is formally stated in your divorce decree to pay alimony to your former spouse, you can deduct this amount on your tax return. And likewise, if you receive alimony, you must report the amount as income. But again, it needs to be formally stated in the Marital Settlement Agreement as to the amount of alimony and frequency of the payments (monthly, every other month…)
On the other hand, child support is not a taxable deduction; meaning, if you pay child support, even it is formally stated in your settlement, you cannot deduct this amount on your tax return.
It is normally stated in the Marital Settlement Agreement that the custodial parent (the parent with the majority time sharing with the child) will take the tax credit. Some couples establish a routine of each parent claiming the tax credit every other year, meaning one parent received the credit one year, and the other parent receives it the next year. While many couples think this arrangement is ‘fair’ it is not always a wise tax decision. Here again is where a licensed tax professional can show you that you both may be missing other deductions that would benefit you both for one parent to always claim the credit.
It is Recommended to Seek Advice
Before the final paperwork is signed and notarized, it is strongly recommended that you make an appointment with your accountant or a tax specialist to review your terms and advise you on the tax implications of your divorce.
You hired your attorney to give you the best legal advice and to help ensure decisions were made in your best interest, the same holds true for an accountant. Taking one day to speak with a licensed tax specialist may save you many years of lost tax money.