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Sunday, September 23, 2012
Taxes and Divorce
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Practical Tax Guide for Divorce
This document represents the author's opinion and
of current tax law and does not necessarily represent
the interpretation or
opinion of H&R Block or the Internal Revenue
Tax issues for divorcing couples has become more complex
every year, and recent tax law changes have made it even more imperative that
good preparation and advice be given during and after a divorce is final.This guide is designed to help a divorce
lawyer give the best possible advice to their clients, as well as prevent them
from making some common tax mistakes.
Tax planning begins at the moment of separations.Many individuals are unprepared for the
effect that separation has on their tax situation.Most only discover the difficulty when they
go to file their taxes and discover that they can't file as Single. Keep in mind that marital status is determined on 12/31 of the tax year. If you are still married and living together on this date, all the stuff about custodial vs. non custodial parent doesn't apply. Children are claimed via standard tie-breaker rules (# nights, then AGI).
Couples who are still married generally can only file Married
Filing Jointly (MFJ) or Married Filing Separately (MFS).MFS has significant disadvantages due to
disallowed deductions and lower income thresholds.It is rarely a good way to file.In order to avoid this quandary, you have
limited options: (listed in general order of preference)
I..The custodial parent may be able to file Head
of Household if they meet all the following requirements:(The non-custodial
parent would be MFS unless they had a child)
are unmarried or “considered unmarried” on the last day of the year.
are considered unmarried on the last day of the tax year if you meet all the following
file a separate return.
paid more than half the cost of keeping up your home for the tax year.
spouse did not live in your home during the last 6 months of the taxyear.
d. Your home
was the main home of your child, stepchild, or foster childfor more than half the year.
paid more than half the cost of keeping up a home for the year.
“qualifying person” lived with you in the home for more than half the year
(exceptfor temporary absences, such as
school). However, if the “qualifying person” is your dependent
parent, he or she does not have to live with you.
must be able to claim an exemption for the child. However, you meet this test
if you cannot claim the exemption only
because the noncustodial parent can claim the child using the rule for divorced or separated parents (or parents who live apart)
II. They may file Single if they obtain a divorce
or separation agreement prior to 12/31 of the tax
year.I understand that SC does not do
formal separations but I believe you can sign anagreement and file it with the court - this would satisfy the
III.They may file MFJ with their spouse and divide
Once divorced or separated there are a number of issues to
consider.I'll start with the
Who can Claim the Child:
The IRS uses many of the same terms that lawyers and laymen
use, but they don't mean the same thing.Many people believe that custody as granted in a divorce decree is
custody for taxes.It is not.The IRS defines custodial parent as the
parent the child spent the most nights with during the tax year.In the event of a tie, the parent with the
higher Adjusted Gross Income is the custodial parent.Nights are counted based on spending with the
parent or in the parents home.If the
child is not with either, the night counts for the parent who would normally
have the child in their home.This could
happen for sleepovers or when the parent is military deployed, so the deployed
individuals family takes the child.
Again, the IRS does not care what the divorce decree
says.Another important point is that a
divorce decree cannot force a parent to grant the exemption to the non-custodial
parent (except decrees before 1985.)After 1984 and before 2009, a divorce decree that gives the claim to the
non-custodial parent WITHOUT ANY ADDITIONAL REQUIREMENTS (such as up to date on
child support) and states that the non-custodial parent can claim the child and
that the custodial parent will not for specified years may be used for the
non-custodial parent to claim the exemption.The decree must be signed by the custodial parent (judge signature not
required.)This is an important point.Post 1985, only the custodial parent can
release an exemption - the divorce decree was simply the method by which it was
done.It can be revoked, by providing
(or good faith attempt to provide) in writing to the non-custodial parent that
the custodial parent is releasing the exemption.This notice and proof of attempted delivery
must be enclosed with the tax return.Post 2008, only a signed IRS form 8332 or similar statement may release
the exemption.There is some argument as
to whether a judge can compel a parent to provide this, but prevailing opinion
is leading to the idea that it cannot.
My recommendation to divorce lawyers is that if they are
representing the non-custodial parent that they get an 8332 form signed
specifying all years that their client may claim the child.It is still revocable, but this is still the
best way.If I was representing the
custodial parent, I would recommend they not provide the form upfront, rather
that they provide it each year.Obviously the tenor of the divorce will affect this decision.
The non-custodial parent will have to attach this form to
their return (or mail in with IRS form 8453 if electronically filing) each year
they claim the child.
Who can Claim What for the Child:
This is vitally important and regularly done wrong.When the non-custodial parent is claiming the
child, it is vital that BOTH parents file the child correctly.They are "splitting" benefits.As a general rule, the non-custodial parent
only gets the exemption and the Child Tax Credit.The custodial parent is the ONLY one who can
get Earned Income Credit (EIC) and the Daycare Credit, as well as file as Head
of Household.Even when the non-custodial
parent makes too much money to get EIC, they must still file as the non-custodial
parent.No divorce decree, judge or
lawyer can change this.Other items are
Medical Expenses go to who paid them
Education Credits go with the exemption (custodial unless
Child Support and Alimony:
Child Support is never taxed or deducted, Alimony is
generally taxed to the recipient and deducted by the payer. If Alimony and or Child Support is not up to date, payments are presumed to be Child Support first, and then Alimony. Alimony has special tax requirements and recapture rules, so don't assume that just because the divorce decree calls it alimony that it qualifies to be deducted.
Final Points: Make sure you have your children's and ex (or soon to be ex) spouses SSN and birthday - you will need them for taxes!
If you have any questions, feel free to contact me, Kirk
Taylor, at email@example.com.
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