Each year, as tax deadlines approach, tax issues for divorced or divorcing parties’ surface. Issues such as marital status, dependent exemptions and alimony requirements have an effect on a party’s tax return. A few of the more common tax issues in a divorce situation are explained in this article.
The marital status for divorced or divorcing couples on the last day of their fiscal year determines their tax filing status. For most taxpayers, the calendar year is their fiscal year. Thus, the divorce must have been final prior to the end of the year. If the final decree of divorce was not granted until January, the parties can still file a joint return or can file as married by separate, but they cannot file as a single taxpayer.
Spousal Maintenance and Alimony
Unlike child support payments, there are tax consequences of receiving alimony. Alimony must be reported as ordinary income. Likewise, alimony or spousal maintenance payments made during the tax year are a deduction from gross income. The party need not itemize deductions. The tax consequences of receiving and paying spousal maintenance should be considered by divorcing parties when their divorce is ongoing.
Child Support and Related Tax Issues
Child support payments made are not allowable tax deductions. Child support received is not considered income for tax purposes. It is not reported on a taxpayer’s 1040. However, various tax issues related to child support are important to remember.
Often when parties divorce, they will share the tax exemption for a child as a tax dependent. If there is only one party of the parties, they may alternate the years of claiming the child as a dependent. If there is more than one child, the parties may each claim one child, and the other parent may claim the other child.
To do so, the custodial parent must sign an IRS 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. The form simply states that the parent waives the exemption for a child, providing the child’s name and Social Security Number. The form also permits waiving the claim for the child as a dependent for alternating years. The noncustodial parent must provide a copy of the 8332 with their tax return. In years past, a noncustodial parent could submit applicable pages of their divorce decree, but this is no longer the case.
In an ongoing case, the parties must consider tax consequences of claiming a child when calculating child support. If the custodial parent refuses to waive an exemption, the court may be able to reduce child support, based on the dollar value of the child as a dependent.
This is done by multiplying the exemption amount ($3,800 for tax year 2012) by the party’s income tax bracket. Other credits, such as the child tax credit and the additional child tax credit, can also be factored in.
All parties in the process of a divorce or who have recently been divorced should consider these tax issues. Consultation with a qualified tax professional is recommended.