Like most life-altering events in Texas, getting a divorce has tax consequences. Tax planning should play an important part in preparing for the divorce and negotiating property division, spousal support and other legal matters.
The timing of the divorce determines a spouse’s tax status and their tax bracket. If a divorce was finalized by the last day of the year, the Internal Revenue Service (IRS) considers the spouse as being unmarried. For that year, the spouse is no longer classified as married filing jointly or married filing separately. These spouses will have to file as single unless they have children or other dependents living with them which places them in the head of household status.
Annulments are even more complicated. Because an annulment indicates that a spouse was not married, amended returns must be filed changing the taxpayer’s filing status for all the open tax returns from earlier years.
Divorce also impacts tax exemptions. Once spouses are separated, only one spouse can claim the child dependent exemption, which is usually a tax deduction of $4,050 for each dependent.
Usually, the custodial parent or the parent who resides with the child for most of the year may claim the dependent exemption. The spouse may allow the other noncustodial parent to claim this exemption as part of the divorce settlement, however.
Both spouses need to execute a Form 8332, which the noncustodial parent must file with their tax return. If the noncustodial parent does not comply with any agreement made for claiming this exemption, such as paying child support, the custodial parent may revoke their original form granting the exemption to the noncustodial parent.
A spouse who pays alimony may claim it as deduction while the spouse who receives this support must report it as taxable ordinary income. This spousal support must be paid in cash, checks and money orders in accordance with the divorce decree or settlement. Child support, however, is not deductible to the payer or taxable for the recipient.
Other exemptions that were claimed as joint filers only go to one spouse after the divorce. These include the child tax credit and the mortgage interest deduction.
An attorney can help a spouse consider and negotiate legal matters that have tax and other financial consequences. A lawyer can also help ensure that a spouse’s interests are protected in settlement negotiations or in court.
Source: The Motley Fool, “Getting divorced? Here are 4 ways your taxes will change,” Wendy Connick, Sept. 24, 2017