Couples who divorce face unique tax challenges during filing season. In addition to their emotional burdens, they face the daunting task of determining what income is taxable or what deductions to take. Discussing these details may not be an option, especially if one or both partners are still struggling from the breakup of the marriage. Several items impact the tax liability of those who divorce.
Throughout their marriage, the couple may have filed as married filing jointly or married filing separately. Now that they are no longer legally married, they need to choose a different filing status. The options available for the divorced person are single or head of household. If the individual has a child in the house and he paid more than half of the household costs for the year, he may qualify for head of household. If not, he must file single. Filing as head of household reduces his tax liability.
When a married couple has dependent children, they claim those kids as exemptions on their tax return. When they divorce, only one parent can claim the exemption for each child. In some cases, the parents agree that the noncustodial parent claims the exemption or they alternate years. This agreement must be in writing to be valid. Without a written agreement, the custodial parent claims the exemption.
When a marriage ends in divorce, parents find themselves dividing the life of the child between them. The parent in the primary household where the child lives becomes the custodial parent. Caring for a child is the responsibility of both parents. Even though the child lives with the custodial parent, both parents must contribute to the care of the child. The custodial parent provides the daily physical care along with financial support. The noncustodial parent contributes financially by making child support payments to the custodial parent. These payments are designated for the care of the child and are not tax-deductible. The tax liability on the income earned and paid for child support remains with the noncustodial parent.
Alimony payments refer to payments made from one party in the divorce to the other. Divorce judges award alimony when one person historically ran the household without bringing in financial support. The judge may award financial payments to that person for a limited time. Alimony payments are taxable income for the recipient and a tax deduction for the payer. The tax liability on the income earned and paid for alimony belongs to the person receiving the alimony.
During the year the divorce occurs, the couple might receive joint income. Joint income, such as earnings on investments, normally gets reported under one person’s Social Security number. Because the income belongs to both parties in the divorce, those earnings are divided equally between them. This applies only during the year of the divorce.
Deductions reduce the tax liability for the taxpayer. The couple may have incurred deductible expenses during the time they were married. These may include the mortgage interest deduction, property tax deduction or medical expense deduction. Only one of the former spouses may claim each deduction. The two people or their attorneys need to negotiate which person can claim each. If an agreement is not reached and both people claim a particular deduction, they will likely experience an audit.