It’s Tax Time: Income Tax Considerations During a Divorce

If you are in the middle of a divorce proceeding, you may be wondering how you should file your tax return, whether you can claim the children as dependency exemptions and how to determine whether support payments should be deducted or included as income.  The following brief, non-exhaustive summary will help you navigate these issues so that you are well-prepared for your tax appointment.  However, given the complexity of tax laws, it is always a good idea to speak with legal and tax professionals who can analyze your specific situation.

What is my Filing Status?

When deciding how to file, remember that your filing status is determined by your marital status on the last day of the calendar year.  For example, if you filed for dissolution on June 30, 2009, but did not obtain a judgment of dissolution until January 1, 2010, you cannot file as a single person on your 2009 income taxes.

If you are still married, you and your spouse must decide whether you will file your returns jointly (“married filed jointly”) or separately (“married filing separately”).  Generally, the high earner gets a benefit from filing a joint return, however, with a joint return comes joint and several liability, meaning that both spouses are liable for any taxes owed, regardless of who earned the income.   Except in certain limited circumstances, you cannot amend a married filing jointly return to a married filing separate return, so if you have any doubts about how to file, you should err on the side of caution and file married filing separate.

Who Gets to Claim the Kids?

If filing separate returns, you must determine who will claim the children as dependents.  The general rule is that the primary custodial parent will take the exemption, but that parent can release the exemption to the other.  For tax purposes, the primary custodial parent is the one with at least 51% custody.  It is therefore important when entering into a joint 50/50 custody agreement to include a provision that for tax purposes, one of the parties will be deemed to have 51% custody.  When there are two children, you can each take 51% custody of one child and share the deductions.  If there is only one child, you can alternate 51% custody on a yearly basis.   If this is not spelled out in your custody order, the IRS will give the deduction to whoever had the child at least 51% of the year, so parents should keep good records of their actual time with the child(ren) in the event there is a dispute over who is entitled to take the deductions.

Can I Deduct Support I Paid/Is Support I Received Taxable Income?

Another common question is whether support paid or received should be deducted from income of the payor and included in the payee’s income.  The general rule is that the payee’s gross income does not include amounts received for child support, but does include money received for spousal support/alimony.  Similarly, a payor cannot deduct child support payments, but can deduct spousal support payments, which are an “above the line” deduction.  To be deemed spousal support, payments must meet numerous IRS requirements, including, but not limited to, that the payments be made in cash by or on behalf of a spouse under a written divorce or separation agreement or decree.  There are also special rules relating to spousal support and equalization payments made as part of a property settlement; if not properly structured, a payor can lose the right to deduct all spousal support payments made under the agreement.  The IRS rules related to “front loading” are beyond the scope of this article, but should be discussed with a legal and tax professional so that you can structure a settlement that does not trigger this issue.