Filing one’s taxes during or immediately after a divorce can be especially challenging. Before your divorce is finalized, there are a few tax considerations that should be addressed. Addressing these issues prior to finalizing your divorce will help ease the transition during tax season post-divorce, and may help you avoid any negative tax consequences or an IRS audit. The following points should be considered during the divorce proceeding, and are important to discuss with an attorney or your tax preparer to determine the tax consequences of your divorce agreements:
- When can you file as single, married filing jointly, married filing separately, or head of household, and which options offer the best possible benefits? Once your divorce is finalized, you are considered unmarried for the entire year of your divorce, this includes if you get divorced on December 31st. If your divorce is not finalized by December 31st, you will have to file your taxes as married filing jointly or married filing separately. There are rare occasions when you can even file head of household even though you are married. Determining your tax filing status, should be done with the assistance of an experienced tax preparer with the goal of maximizing the best financial result to you and your spouse. This may require you to work cooperatively with your soon-to-be-ex to determine the best means to file your taxes and to take advantage of the benefits offered by doing so.
- Which parent can claim the child or children for the dependency exemption and take the applicable tax credits offered to parents? Generally, the parent with primary placement of the child(ren) may claim the child(ren) on their tax return. However, parties can negotiate who can claim the exemption in divorce cases or the court can order the same. It is imperative to include in the Marital Settlement Agreement an award of how each party shall claim the child(ren) on their respective tax returns.
- What do parents need to claim the child(ren) as a dependent? Parents must complete an IRS Form 8332 “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent,” to allow the other parent to attach it to his or her tax return if they are claiming the child(ren) Form 8332 is the document that allows a parent to claim a child on his or her taxes even though he or she may not fit the requirements under IRS rules to do so.
- Do I have to report child support as income? Child support payments are not deductible by the paying parent or taxable to the parent receiving the child support.
- Can I deduct maintenance payments? Maintenance payments (or alimony) are generally tax deductible by the party making the payment, and must be claimed as income by the recipient. It may be helpful to include a reference to the federal tax code IRC 71 in your divorce decree can ensure that the parties are aware of their responsibilities regarding maintenance payments.
- Do I have to pay taxes on assets awarded to me in my divorce? A property transfer between divorcing spouses does not create any additional tax liabilities, if it is ordered in the divorce decree.
- Do I have to pay taxes on retirement assets awarded to me in my divorce? In order to avoid tax consequences when dividing a retirement account incident to a divorce, a Qualified Domestic Relations Order or QDRO, may need to be drafted after the date of divorce to instruct the retirement plan administrator to divide the benefits as ordered by the divorce decree. If the recipient spouse does not liquidate such funds and follows the IRS rules to invest such funds into a qualified plan, there are no tax consequences to such a transfer.
- Will I be audited post-divorce? You risk being audited if you do one or both of the following: 1. both parents claim the same child on their taxes, 2. The amount of maintenance the recipient lists on line 11 of his or her 1040 does not match the number that the payor lists on line 31a. It is always good practice to speak to your ex-spouse before filing your taxes to make sure that you are claiming the correct child(ren) and that the amount of maintenance listed as received on your tax form matches the amount of maintenance paid.
There are several considerations in determining what options are best for you to maximize your tax benefits and to avoid any additional tax burdens after a divorce. Because each divorce is unique, it may be important to speak with an attorney or a tax professional to best address the tax consequences of your proposed divorce agreement before finalizing your divorce. If you are getting a divorce and have questions regarding the tax consequences of the issues outlined above, call us at (414) 258-1644 to schedule a free initial consultation to discuss your case.