Tax Implications and Deductions after Divorce | Coon Rapids Minnesota
Divorce is a stressful experience and decision making is often complicated by heightened emotions. It’s critical that divorced individuals discuss their tax plans with their ex-spouses before filing their returns, in order to avoid problems with the IRS.
Tax implications of divorce costs
None, legal fees are considered personal expenses, therefore they CANNOT be used as a deduction.
Tax implications of spousal maintenance
Spousal maintenance is a tax deduction for the person who is paying and is reported as taxable income by the person who receives. Because it is considered earned income to the recipient, in some situations that person may need to make estimated tax payments throughout the year to avoid any penalties when filing.
Spousal maintenance reduces the gross income (and taxes) of the payer. Therefore, in circumstances where one party has a substantially higher income, it may be within IRS regulations to lower the overall taxes paid by both parties by moving money from a higher tax bracket to a lower tax bracket thereby creating less tax liability. It is worthwhile to understand these implications when setting the amount for spousal maintenance. There are times when it is best to rely on financial experts to create a solution with the best tax benefit for both parties.
Tax implications of child support
Unlike spousal maintenance, child support payments have no tax implications. Child support it is not taxable to the recipient or deductible to the payer. However, if the payer is paying both spousal maintenance and child support but is paying less than he/she is supposed to, the payments will apply to child support first, and then spousal maintenance. Therefore, if you are behind on child support but keeping up with spousal maintenance be sure you don’t take a deduction at tax time without figuring what portion of spousal maintenance would be credited by the IRS as child support and then no longer legally deductable.
Tax implications of dependency exemption for children after divorce
Only one parent can claim a child as a dependent after a divorce and receive a tax credit. Your divorce decree should specify how this exemption is to be taken. If your divorce decree does not specify which parent gets the dependency exemption, the IRS does. According to the IRS, the parent who has the child for the most nights in the year is the parent entitled to take the exemption. Period. It has nothing to do with who pays child support or how much is paid or what kinds of expenses the child has. This is the default rule to follow.
Unique situations come up when the parenting time is 50/50…
- If there is one child, some co-parents alternate years
- If there are an equal number of children, the divorce decree (or amicable co-parents) may assign which children will be the exemption on whose tax form.
- When there are an odd number of children, a combination of the first two options is utilized.
You are permitted to change the exemption if you both agree to do so. You may be in a situation where one parent earns substantially more than the other and the exemption will be of more value to that parent (always check with your tax preparer to find out if and how you will benefit from taking the exemption). Regardless of which spouse is entitled to claim the children as dependents based on the IRS rules, the spouses can agree to stipulate which one will claim the dependent. If the noncustodial parent will claim the children, that parent needs to attach Form 8332 to his tax return, signed by the other parent.
NOTE: If both spouses claim the same child/children on their taxes, the IRS will determine which parent is legally allowed to claim the children. After the IRS makes the determination, the parent who wrongly claimed the children will have to pay the additional tax plus interest and penalties.
Tax implications of filing head of household after divorce
Head of household status is separate from the dependency exemption. Even if your ex takes the dependency exemption, you may qualify for head of household if your child lived with you more than half the time, you paid more than half of your household expenses, and you are unmarried. When there is a 50/50 parenting time and multiple children involved, it may be possible for both co-parents to file head of household IF they assign at least one child to sleep at each household more than half the time. As always, check with your tax preparer to make sure you qualify.
Tax implications of MSA and Health Savings Account tax deductions after divorce
Although the IRS has a hard and fast 50% rule for the dependency exemption, it is possible for both parents to claim children for the purposes of Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs). If you have one of these employer-provided benefits, check with your tax preparer about claiming your child.
This article provides only general information – NOT tax advice. For information on all the tax breaks and exclusions, see Publication 504 (Divorced or Separated Individuals) at www.irs.gov. Seek your own professional legal or tax advice concerning your unique situation.