Divorce is a tough process, and one that does not end after a court date. Knowing your rights and obligations and understanding the tax implications can make the process less difficult. The tax consequences of a divorce include issues related to income and deductions, tax credits, and filing status.
To prepare for a divorce, you can assist your lawyer by obtaining a copying of your marital tax returns for at least the three previous years. Tell your lawyer if you do not remember signing any of your returns. The IRS provides Form 1040 tax return transcripts. Transcript requests can be made by going to IRS.gov, using the order a transcript tool, or by calling 1‐800‐829‐1040.
As of 2019, alimony is tax deductible to the person who pays it, but it is taxable income of the person who receives it. Child support is not tax deductible to the person who pays it and is not included by the person who receives it.
There may be tax advantages in how to structure these payments. You should consult with your attorney about how to structure these settlements.
Your filing status depends on your marital status on the last day of the tax year:
You may qualify for Head of Household (HOH) if you meet all these conditions:
Where there is only one child, only one parent can claim HOH. If there are two children, both parents can claim HOH, so long as one child lives with one parent more than half the year, and the other child lives with the other parent more than half the year.
Generally, if you qualify for HOH, then you will usually benefit from any related Dependent Care Credit or Earned Income Credit.
A non-custodial parent seeking to claim HOH should have the custodial parent execute Form 8332.
Your filing status depends on your marital status on the last day of the tax year:
You may qualify for Head of Household (HOH) if you meet all these conditions:
Where there is only one child, only one parent can claim HOH. If there are two children, both parents can claim HOH, so long as one child lives with one parent more than half the year, and the other child lives with the other parent more than half the year.
Generally, if you qualify for HOH, then you will usually benefit from any related Dependent Care Credit or Earned Income Credit.
A non-custodial parent seeking to claim HOH should have the custodial parent execute Form 8332.
Dependency Exemption
Only one taxpayer may claim a child for any credit in a tax year. You cannot split these credits between two or more taxpayers. Generally, the child is the qualifying child of the custodial parent.
However, you may treat the child as the qualifying child or qualifying relative of the noncustodial parent if the special rule for a child of divorced or separated parents or parents who live apart applies, which requires, in part, that both following conditions are met:
In addition, if the custodial parent releases a claim to the child for a specific year, the custodial parent may not claim the Child Tax Credit for that child.
The Default Rule is to allow the parent who has the child for the most nights in the year to claim the child as qualifying. Note: Monetary contributions are not considered.
Tax Credits and Children
Generally, only the custodial parent can claim the child related tax credits, unless the custodial parent agrees to release their exemption using form 8332. Parents can agree to “trade off” tax years for tax purposes.
Child Tax Credits
A parent taxpayer may be able to claim a child tax credit up to $2,000 for each qualifying child. To qualify, the child must be listed on the tax return, be under 17 by year-end, and be the taxpayer’s child (or that of their brother or sister and be cared for by them as their own child). The non-custodial parent may be able to claim the credit if the above requirements are met and the custodial parent releases their exemption using form 8332.
Child and Dependent Care Credit
To qualify, a custodial parent must pay for the cost of care for a qualifying dependent.
Because of the home requirement, only the custodial parent can claim this credit.
Earned Income Tax Credit
This is refundable credit that can only be claimed by the custodial parent. The amount of the refund is adjusted depending on the number of qualifying children because the child must live with the taxpayer more than half the year. Since the credit is phased out for higher income, it may be the case that only one spouse could qualify for the credit, usually when there is a low-income spouse.
Education Tax Credit
This is refundable credit that can only be claimed by the custodial parent. The amount of the refund is adjusted depending on the number of qualifying children because the child must live with the taxpayer more than half the year. Since the credit is phased out for higher income, it may be the case that only one spouse could qualify for the credit, usually when there is a low-income spouse.
Medical Savings Account (MSA) and Health Savings Account (HSA) Deductions
It is possible for both parents to claim children for the purposes of MSAs and HSAs. If you have one of these employer‐provided benefits, check with your tax preparer about claiming your child.
Often it is the case that after divorce, one taxpayer can benefit from the above tax considerations. So, when negotiating a divorce settlement, learn how the various tax credits would benefit each party. Consult with your attorney regarding the different scenarios.
