Bankruptcy Blog For You

Divorce, like marriage, marks an important change of life. It not only leaves you at the crossroads of emotions but also impacts your financial life to a great extent. You get busy dividing your assets with your spouse and keep fighting for your children’s custody. A faint thought of dividing the debts crosses your mind too, but what you forget to pay heed is tax debts.

Divorce and separation impact your taxes significantly. Here is a brief overview of the possible tax implications post divorce:

Filing Status:

Your tax filing status will be determined by your marital and family status as of December 31. If you were divorced by then or had been separated legally, you will have to file as a single tax payer.

If you are married as of December 31, then your filing status will be determined as follows:

· If you and your spouse lived in the same house and were not legally separated till December 31, you must file as married (either a joint return or separate returns). Usually, filing for a Married Joint Return will get you lowest tax amounts.

· If you were legally married till December 31, then you can file as Head of Household, provided:

1. You were unmarried or considered unmarried on December 31.

2. You paid more than half the cost of keeping up a home for the year.

3. A child or other qualifying person lived with you in the home for more than half the year for whom you or the other parent is entitled to claim the tax exemption.

Alimony and Child Support:

Periodic alimony is included in the taxable income of the recipient, and it's tax-deductible to the payer. Child support is not included in the taxable income of the recipient, and it's not tax-deductible to the payer. So all other things being equal, payers want as much of support as possible to be in the form of alimony, and recipients want as much of support as possible to be in the form of child support.

Exemptions on Children:

Most divorcing couples are aware of the exemptions for the children. The IRS assumes that the custodial parent is entitled to the tax exemptions. However, the parents are allowed to trade them back and forth freely, using IRS Form 8332. With the passage of the Tax Reform Act of 1997, the exemption now carries with it the right to use the child credit for each child, as well as to use the Hope Scholarship and the Lifetime Learning Credit.

When there are multiple children, parents often split the exemptions to make the situation fair to both the parties. But that is not a good idea. If one spouse's income is substantially higher than the other spouse’s, then splitting will cause the parents to miss out on a chance to maximize tax savings.

So, the better idea is to seek advice of a tax consultant who can calculate the value of the exemption(s) to each spouse and guide accordingly.

Child Care Credit:

Custodian parent is entitled to claim a credit of a percentage (usually 20% to 30 %) of the cost of work-related child care that extends up to $960 for multiple children below 13 years. It is a credit for child care expenses and cannot be traded between the custodian and the non-custodian parents. Even if the custodial parent is assigned one or more exemptions using IRS Form 8332, it will in no way affect their ability to claim child care credit.

Divorce filing and Tax

Make sure that you have all tax related issues settled and clearly stated in your separation agreement and or divorce decree. Also remember that since your marital status is crucial to your tax return, you should also be careful about the divorce timing. If you are planning a divorce at the end of the year, then it will be wise to postpone it to the next year so you can file as a Married Joint Tax payer and maximize your tax savings.

The IRS is not guided by divorce decrees and too many people negotiate and finalize their divorce without taking proper account of the tax impact of the decisions they are considering. So, it is important to remember that tax is an area where you should try your hardest to keep the lines of communication open and the emotions out so you can work towards your taxes better. The best way to deal with tax issues in divorce is to consult a reputable tax debt attorney in your state.