Divorce, Separation, and Taxes
A life event such as separation or divorce has many tax implications. See the list below for important information on how these events may affect your tax return:
Can You Deduct Alimony or Child Support?
Alimony is the money paid to you or your former spouse, as agreed upon in your divorce or separation arrangement. If you pay alimony, you can deduct it on your tax return. If you receive alimony, you have to report it as income on your tax return. For the payments to be qualified as alimony, the alimony must be written out in your separation or support agreement, a stipulation of settlement in your pending divorce again, or a court order or judgment. Money received for child support is not considered alimony. Child support is not deductible for the person who pays it, nor is taxable for the person who receives it.
Which Parent Claims the Dependency Exemption?
As a general rule, a child can only be claimed on one tax return. This may present a problem if you are divorced or separated. Only one parent can claim the dependency exemption. The parent who claims the dependency exemption is also entitled to the $1,000-per-child tax credit for children under 17, assuming his or her income is not too high.
This is usually a straightforward decision if you have a divorce decree which names the custodial parent. If not, you are considered the custodial parent if your child lived with you for a longer period during the year than with your former spouse. Sometimes the noncustodial parent can claim the exemption if the custodial parent signs a waiver pledging that he or she won't claim the child.
Sometimes, a parent will claim the dependency tax exemption when they are not entitled to it. If your former spouse files his or her tax return before you do, it is possible that he or she would be allowed the exemption, at least temporarily. Once the IRS looks at your return and they detect a duplicate Social Security number (your child's) being claimed by another taxpayer, the situation changes.
Find out what happens when two people claim the same dependent.
Divorced Filing Status
Couples who are not yet officially divorced before the end of the year can still file a joint return. You will lose the option to file a joint return when your divorce decree becomes final.
If you can't file a joint return for the year, you can file as Head of Household (and get the benefit of a bigger standard deduction and more advantageous tax brackets) if you had a dependent living with you for more than half the year and you paid for more than half of the upkeep for your home. Otherwise, you may need to file as Single.
Find out what filing status to use.
Exemptions for Dependents
You can claim your child as a dependent on your tax return if the divorce decree names you as the custodial parent. If it is not mentioned, you would still be considered the custodial parent and be eligible for the exemption if your child lived with you for a longer period of time during the year than with your former spouse. If you are the parent who claims the dependent exemption, you can also claim other certain other credits, such as the Child Tax Credit or one of the education credits. If you can't claim the exemption, you can't claim those credits even if you pay the education bills.
Find out who qualifies as your dependent.
Medical Bills and Expenses
If you continue to pay your child's medical bills after the divorce, you can include those costs in your medical expense deductions even if your ex-spouse has custody of the child and claims the dependency exemption.
Other Tax Credits
Even if your former spouse qualifies to claim the dependency exemption, you can still claim the childcare credit for work related expenses you incur to care for a child under age 13. Remember though, only the parent who claims the child as a dependent can claim the child tax credit.
Payments Made to Your Former Spouse
The spouse who is paying alimony can take a tax deduction for the payments, even if he/she doesn’t itemize their deductions. Remember that the IRS won't consider the payments to be true alimony unless they are made in cash and spelled out in the divorce agreement. The spouse receiving the payment must pay income tax on those amounts. Make sure you know your former spouse’s Social Security number because it needs to be reported on your tax return to claim the alimony deduction.
Transfer of Assets
Sometimes a divorce settlement will transfer property from one spouse to another. If that happens, the beneficiary doesn't pay tax on that transfer. It’s important to note that the property's tax basis will also shift. For example, if you receive property from your former spouse in the divorce and you later sell it, you will pay capital gains tax on all the appreciation before as well as after the transfer. So you need to consider the tax basis as well as the value of the property when you are splitting up property in a divorce settlement.
Sale of Home
If you and your former spouse decide to sell your home when you get divorced, there may be capital gains tax impacts on you. Usually, you can avoid tax on the first $250,000 of gain on the sale of your primary home if you have lived in it for two out of the past five years of ownership. If you sell property after your divorce and if the two above provisions (own and live) have been met, you and your former spouse can each exclude up to $250,000 of gain on both of your returns. If the sale happens after the divorce, then you may qualify for reduced exclusion even if the two-year tests have not been met. Also, if you receive the house in your divorce settlement and then sell it some years later, you can exclude up to $250,000. The amount of time that your former spouse owned the house will be added to your period of ownership in the two year test.
Transferring Retirement Assets
During a divorce, it is important to carefully handle your retirement savings. If you decide to give your 401(k) money to your former spouse, the IRS may consider that a taxable distribution and you will be taxed on it. In order to avoid this, you should arrange for a transfer under a qualified domestic relations order (QDRO) which will allow your former spouse access to the 401(k) funds and you will not be stuck paying the tax.
Related Tax Topics:
How to claim a dependent
What if both parents claim the same dependent?
Not responsible for your ex-spouse's tax debts? Learn about innocent and injured spouse tax relief
Read more about the tax implications of a divorce or separation
Find out about marriage and taxes
See if you may qualify for other tax deductions