Virtually every issue relating to marital separation and divorce has tax consequences. Tax-related decisions must be made on matters concerning filing status, dependency exemptions, and child and spousal support payments. If you plan to file for a divorce, or if you think your spouse may want one from you, below is a summary of issues to keep in mind.
Your filing status affects your tax rate and determines which deductions and other tax benefits you can claim. Filing joint tax returns generally results in the largest amount of tax savings. Separated spouses can only file jointly for the entire year if on December 31, they are living apart, but not legally separated or divorced under a court order. An important tax consideration to consider for joint filing status is the risk posed by joint and separate liability. Unless you qualify for “innocent spouse relief,” if your spouse does not pay the taxes owed, you are generally liable for the entire tax bill.
Separated spouses must file tax returns as married persons filing separately if they are still legally married on December 31 of the taxable year, unless they agree to file a joint return or a court has entered a judgment of legal separation. Although filing as married filing separately avoids sharing liability for each other’s tax obligations, this filing status leads to paying more taxes. A status as married filing separately requires both individuals to allocate their income. All income earned before separation is divided evenly, and income earned by either individual after separation is allocated as his or her separate income.
If you are legally separated or divorced on December 31 of the taxable year, but you pay for at least half of the expenses needed to maintain your home in which at least one dependent lives with you, you may qualify for head of house hold status. This filing status generally provides a larger standard deduction with more favorable tax brackets than filing as single.
Another impact on taxes after a divorce is who claims the child, or children, as exemptions on their income tax return. A custodial parent who is able to claim a child as a dependent is permitted significant deductions on their tax return. To qualify for the child dependency tax exemption, the child must live with you for more than half the year, and must not have provided more than half his or her own support for that year. In certain circumstances, the noncustodial parent may also qualify for this exemption, although only one tax exemption is allowed for each child.
Child and Spousal Support
As a general rule, spousal support (alimony) is taxable to the recipient and deductible by the payer. However, the IRS has very strict rules regarding what qualifies for the spousal support deduction. Requirements for deductible spousal support include: payments must be made in cash or by check, payments must be received under a “divorce or separation instrument,” the parties must not live in the same home after divorce or separation, and the payer must file a separate tax return for the taxable year in question. Additionally, spousal support payments may be treated as nontaxable and nondeductible simply by designating them as such in the divorce or separation instrument.
Child support payments, on the other hand, are always tax-neutral. Child support payments are not taxable income for the parent receiving the support, and they are not tax deductible for the parent paying the support.
The law surrounding divorce and taxation is complicated, and the facts of each case are unique. This article provides a brief, general introduction to the topic, and there are many other tax implications to consider. For more detailed information specific to your case, call us today to speak to an experienced and successful Boyd Law San Diego family attorney.