As tax season rapidly approaches, those going through a divorce (or those thinking about doing so) may have some questions about how a split can affect your taxes.
The first, and most commonly asked question is how does a divorce affect your filing status? This is thankfully an easy answer. Your filing status is determined on December 31st of each year. If you were married on that day, then you and your spouse can file a joint tax return if you wish to do so. This is still the case even if the divorce was begun prior to December 31st and you and your spouse were separated at the time. Because you were still legally married, a joint tax return is acceptable. This is good news for lots of couples as “married filing jointly” includes several big tax advantages for filers.
Another question that clients often have is what about the child dependency exemption? Unless your settlement agreement says otherwise, the custodial parent gets this tax break. The Internal Revenue Service‘s guidelines say that you are not allowed to claim the tax credit unless you have custody of the child more than one-half of the year. If the child is truly evenly split between the parties, then the IRS allows the parent with the higher income to take the deduction.
Though many expenses related to your children can be tax deductible, it’s important to note that child support itself is not tax deductible. If you’re paying for childcare, certain healthcare expenses or college tuition, tax deductions are possible and should be explored with your accountant.
The good news for those paying alimony is that alimony payments can be deducted provided the payments align with the following requirements:
- The alimony payments must be made pursuant to the terms of a written agreement;
- They must not be for the support of a child; and
- They must cease upon your former spouse’s death.
Assuming your arrangement meets these requirements then you should be able to deduct the payments from your income. This tax deduction is one of the big reasons why alimony is preferable to lump sum settlements which are not tax deductible.