May 23, 2012
Article By: William Dorsey
Contact Us With Your Divorce and Taxes Law Questions.
Divorce can be one of the hardest periods in an individual’s life. The process of divorce is sometimes painful and always complicated. There are several issues that must be addressed and dealt with before finalizing a divorce. One of the most unpleasant issues is taxes.
Divorce affects the way an individual files his or her taxes and has implications for what income is taxed and what is deductible. It is important to understand and discuss the intersection of divorce and taxes with an experienced attorney early on to avoid problems and misunderstandings in the future. Divorce has tax implications on alimony, child support, claiming a child as a dependent, among other issues.
Alimony is taxable income to the recipient and deductible by the payer. Alimony, also known as spousal support, should be clearly defined as such in the divorce agreement. Alimony payments are an “above-the-line” deduction and do not have to be itemized by the payer on their return. For the individual receiving alimony, it is treated as earned income. Since tax is not withheld on alimony payments, the recipient may need to make estimated payments or increase the withholding amount in their paycheck.
Child support is not taxed as income to the recipient and not deductible by the paying parent. The exact terms in the divorce agreement may have serious tax implications. Only child support is tax-free. If a divorce agreement lumps spousal and child support payments into one category under “family support,” “alimony,” or does not specifically state that the payments are for child support, it is likely none of the payments will be considered child support for tax purposes.
Claiming Child As Dependent
There is also a question of which parent can claim the child as a dependent on their return. The general rule is that a parent may claim a child as a dependent if he or she provides at least 50% of the child’s support during the tax year. This is easy for families living together. In divorce, the custodial parent usually gets to claim the child as a dependent.
For the noncustodial parent to claim the child as a dependent and get the child tax credit, the custodial parent must file Form 8332 to release the child to the noncustodial parent for tax purposes. If a custodial parent qualifies to file as head of household under these circumstances, the custodial parent may still be eligible for Earned Income Credit (EIC), child and dependent care credit and exclusion for childcare benefits for that child.
To qualify for head of household status, a person must (1) be either unmarried or considered unmarried on the last day of the tax year (December 31), (2) have lived with the qualifying child for over six months of the tax year, and (3) have paid for over 50% of the cost of keeping up the home during the tax year. To be “unmarried” a person must have filed a separate return, not lived with the spouse for over six months, paid more than 50% of the home upkeep, and the home must have been the child’s main residence.
The above are just a few of the tax implications of divorce. There are many other issues including possible effects to your IRA or other retirement savings, property, etc. Divorce is always complicated. Discussing your options with a Jacksonville divorce attorney early in the process will minimize future headaches.
Contact Us With Your Divorce, Alimony and Custody Law Questions.