The tax implications of going through a divorce
Going through a divorce can be one of the most painful experiences a person goes through in their life. The last thing that is typically on an individual's mind is how their divorce will impact their taxes. However, separating from a spouse and dividing up assets can put divorcees in a particularly vulnerable financial situation, and understanding how their tax liability may also be impacted can help them avoid unwelcome surprises.
The first tax feature that will be affected is a divorced couple's filing status. An individual's marital status as of December 31 of each year affects his or her filing status. This means that couples who are separated but not formally divorced before the end of the year have the option to file a joint return or married filing separately if they wish. However, if the divorce decree is official by that date, they must file as singles. It is also possible for one ex-spouse to file as head of household after the divorce - which will allow them to secure a bigger standard deduction and more favorable tax brackets - if the person had a dependent living with them for more than half the year and paid for more than half of the upkeep for the home.
Custody agreements may dictate exemptions for dependents
Another thorny issue divorcees may face is determining who may claim their children as dependents on their returns, as both spouses are not entitled to the claim. In cases in which one parent has full custody of the child, that parent alone may claim them as dependents. However, when joint custody agreements are in place, the issue may be more complicated. If the child lives with one parent for the majority of the year, that parent is typically the one to claim the child as a dependent. However, the other spouse may also claim the exemption if the custodial parent signs a legal waiver that pledges they won't claim the benefit.
It's also important to keep in mind that the parent who claims the exemption is also the one entitled to the child credit or an American Opportunity credit, even if the other former spouse pays the college bills.
Lastly, individuals should keep in mind that child support payments are not considered taxable income for the individual receiving the funds and payments are not tax-deductible for those paying support. Alimony, however, is generally taxable and payments are deductible for the payer. Individuals who are going through a divorce may benefit from consulting their tax preparer to better manage their liability.
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