For divorced parents charged with primary custody of children, taking care of those children usually involves day-to-day responsibilities: trimming fingernails, giving baths, supervising homework, preparing and serving meals, and the list goes on. Other times, there are milestone events: a trip to an amusement park, a week at Grandma’s house or filing the federal income tax return.
Wait…what was that last part again?
The tax consequences of a divorce are very rarely, and sometimes even never, brought up during property division negotiations and other related proceedings, unless the division involves million-dollar stock portfolios and other high-end assets. But tax changes can make a very big difference for you and your family, regardless of your family income:
- Filing status: The rule is seemingly quite simple: your marital status on the last day of the year determines your marital status for the entire year. Many divorced parents file as head of household, as this status generally gives you a higher deduction. To qualify as head of household, you must:
- Be unmarried or considered unmarried – which is essentially a de facto divorce – on the last day of the year
- Pay more than half the cost of upkeep on the home for the year
- Have a qualifying person – usually a minor child – living in the house with you for at least six months
Some taxpayers get into trouble by filing as head of household when they did not meet the qualifications: a person may stay rent-free with a friend or relative, or a child may float back and forth between households.
- Support payments: Many people know that alimony is tax-deductible, while child support is not. But did you know that alimony must also be reported as income, while child support does not have to be reported? And did you know that the IRS considers payments to an ex-spouse to be child support first and alimony second? In other words, if you are current on your alimony but behind on your child support, you lose the tax break for your alimony payments.
- Dependent care credit and dependent tax exemption: You can claim the credit even if you cannot claim the exemption, but the reverse may not be true.
- Legal fees: If you are running up a large legal bill thinking that you can write it off next spring, think again. Legal fees in a divorce are personal expenses and not deductible. Many people use mediation or some other alternative dispute resolution method to control costs; mediation has additional benefits, in addition to lower cost.
Matthew Kremer is a San Diego based divorce attorney. He often refers his clients to a CPA, or some similar outside resource, to make sure that his clients understand all the income tax consequences of a divorce: “I don’t want them to be in a situation where, sometime down the road, they get a big tax bill because of a filing error that occurred three or four years before then.â€
Even if you think you know all the rules, consult a qualified professional before you sign that 1040.
