The end of a marriage brings about many changes in your life. One you may not have considered is how divorce will affect the way you file your annual income tax return. It’s important to be aware of tax considerations when drafting your divorce agreement so you’re not caught off guard when April 15 rolls around.
IRS Publication 504 provides guidelines for divorced or separated individuals, but working with a tax professional is the best way to safeguard your interests and ensure that you are filing your return correctly and to your best advantage. A tax expert can also help you make any necessary adjustments for future tax withholding so that you’ll avoid penalties and enjoy the most favorable deductions.
Here are three important areas to consider:
Status: Timing is Everything
This very important distinction is one of the first questions you’ll have to answer on your tax return. Whether you are single or married is dependent upon whether or not you were married as the last day of the tax year (December 31). In other words, if you obtained a divorce decree on December 31, 2019, you may file as Single or Head of Household on your 2019 tax return.
To claim Head of Household, you must
– be unmarried on the last day of the year;
– have paid more than half the cost of keeping up a home for the year;
– have a qualifying child or relative (dependent) living with you in the home for more than half the year.
If you have filed for divorce, but are still legally married on December 31, you may file as Married Filing Jointly or Married Filing Separately. If filing jointly, you and your spouse must both sign the return. A tax advisor can provide insight into which filing status will be most advantageous for you.
Dependents: Defining Custody is Key
If you have sole custody of your children, you can claim them as your dependents. However, in cases where there is joint custody, the status of your dependents may change from year to year. Your divorce agreement should outline a schedule detailing who is allowed to claim the child(ren) as on his or her tax return for a given year.
If there is no schedule specified, the exception for dependents goes to the spouse who meets the IRS’ requirements for custodial parent, which is “the parent with whom the child lived for the greater number of nights during the year. If the child lived with each parent of an equal number of nights during the year, the custodial parent is the parent with the higher adjusted gross income.” The IRS provides lengthy details about what constitutes living with a parent on a given night, including how to count sleepovers at friends’ houses and away camps. If you’re not a CPA or well-versed in tax law, it’s wise to seek the counsel of a divorce attorney and/or tax professional when drafting terms for shared custody.
Alimony: Income or Deduction?
Basically, the rule is this: Whether you’re paying or receiving alimony, you will need to report it as either income or under adjusted gross income.
According to the IRS, “Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. It doesn’t include voluntary payments that aren’t made under a divorce or separation instrument. Alimony is deductible by the payer, and the recipient must include it in income.”
Alimony does NOT include child support or non-cash property settlements; therefore child support is not reported as income, nor can be claimed as a deduction by the person who pays it.
Again, the definition of alimony and what does and does not qualify as such is discussed at length by IRS code. If you are in any doubt as to what qualifies, seek the help of a tax professional.