Divorce, like marriage, marks an important decision in your life. It not only leaves you at a crossroads of emotions, but also impacts your financial life to a great extent. You get busy dividing your assets with your spouse and fighting for your children's custody. While you're dividing your assets, you will also have to divide your debts, including any tax debt.
Divorce and separation impact your taxes significantly. Here is a brief overview of the possible tax implications post divorce:
Your tax filing status will be determined by your marital and family status as of December 31. If you have received a final divorce decree, you will be required to file as single or Head of Household depending on who receives custody of any children.
If you are married as of December 31, then your filing status will be determined as follows:
Periodic alimony is included in the taxable income of the recipient, and is tax-deductible to the payer. Child support is not included in the taxable income of the recipient, and is not tax-deductible to the payer. So it is always to your advantage to pay alimony.
Most divorced couples are aware of the exemptions for the children. The IRS assumes that the custodial parent is entitled to the tax exemptions. 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 the Hope Scholarship and the Lifetime Learning Credit if the child is in College.
The best way to avoid an audit or a disallowance of your dependency claim is to consult a tax specialist who can guide you how to claim the best tax advantages for yourself.
The Custodial parent is entitled to claim a percentage (usually 20% to 30 %) of the cost child care up to $960 for multiple children under 13 years. This credit for child care expenses cannot be traded between the custodial and the non-custodial parent. 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. The child care credit may only be taken by the parent who paid for the service.
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 timing. Because of the recent changes to who can claim a child's tax benefits, both you and your ex-spouse need to consider all of the tax implications before filing. The best way to deal with tax issues in divorce is to consult a reputable tax specialist along with a divorce lawyer.