Divorce and Income Tax: Untying the Knot and Counting the Cost
If you have just been through the trauma of a divorce, taxes are probably the least of your concerns.
December 31st is an important day for you. It is your marital status on that date that determines your tax filing status for the year. If you are divorced as of that date, then you are considered single for the year. If you are married as of that date, then your filing status will be one of the two married statuses- joint or separate. In some cases it might be financially beneficial to put the divorce date off until the new year in order to file jointly for the past year.
There is a significant question asked on the 1040 form which opens a new door for you. It is, “Did your spouse live with you in 2010?” It follows up with, “If so, did you and your spouse live together anytime after June 30th, 2010?” You will not be able to choose the category that gives you the most breaks- Married filing jointly as an officially divorced person. There may be other categories of benefit. The worst one is the married filing separately. As a divorced person probably you are filing single or head of household if you have a qualifying dependent. You may be able to file as head of household and be considered as unmarried if you are either divorced on or before December 31 or even if still married but have not lived together for the last six months.
The other important questions on the side are the ones about the number of children who lived with you and those who did not live with you due to divorce or separation on 6c. These answers are important in determining child tax credits and child and dependent care credits as well as the number of children applying for the Earned Income Credit, and also who is entitled to the education credits for students in college.
A form that you should get to know is Form 8332 Release/Revocation of Claim to Exemption for Child by Custodial Parent. This is because most credits are claimed by the custodial parent but there are some times when the divorce degree establishes that one or more of the children can be claimed by the noncustodial parent. The custodial parent signs the form and gives to the noncustodial parent. He or she must attach it when submitting a return claiming the child as the qualifying child.
The custodial parent can claim a child care expense credit which a noncustodial parent cannot. This is worth up to 30 percent of child care enabling the tax filer to work. It can be to a maximum of $960 for 2+ children under 13.
Some falsely think that the fair way is to share if there are multiple children involved. If one of the parents makes a lot more than the other they will not get the most out of the credits for either of them. It might be worth while to seek the advice of a divorce tax expert. The consultant can advise on the value of exemptions available and a way to compensate can be worked out on that basis.
Distinguish between alimony and child support. Child support is neither taxable nor a deductible expense. Alimony counts like earned income (line 11 on the 1040) for the person receiving it and like an expensed deductible from income for the person paying it (line 31 requires you to list the recipients SS no. and name). So if you are on the receiving end you probably want the child support portion high and the alimony low. But if you are charged with paying, you will benefit by having the alimony high and the child support amount low. If it seems agreeable for items like car payments, home mortgage payments, life or medical insurance to be paid, it is advantage to the one who pays that they be worked into the alimony payment where they can be subtracted from income. Be wary of ‘excess alimony’ which happens if the alimony part of the agreement is too loaded on the front end.
The parent who has custody of the children is entitled to claim a credit of from 20% to 30% of the cost of work-related child care, up to a maximum of $960 for two or more children under the age of 13. Unlike the exemption, the child care credit can’t be traded; it’s available only to the custodial parent. The fact that the custodial parent has assigned one or more exemptions using IRS Form 8332 has no effect on the ability to claim the credit for child care expenses.