Tax Considerations in a Divorce
As with every other part of your life, separation and divorce impact your taxes. This is an area in which you should try your hardest to keep the lines of communication open and the emotions out. Do not assume that you will able to claim all deductions and exemptions. That will only lead to fines, penalties, and audits if you are wrong. Make sure that you have all tax related issues settled and clearly stated in your separation agreement and/or divorce decree.
The information contained on this page is for informational purposes only. Before acting upon or making any decisions based upon the information contained within this page, consult a tax professional experienced in matrimonial issues.
How are you going to file your taxes? Normally filing a Married Joint Return will result in the lowest taxes. Do not look at a joint return as any kind of "attachment" to your spouse. This is strictly a financial decision. You qualify for the Married Filing Jointly status if you are not yet divorced. You do not qualify for this status in the tax year you were divorced.
For non custodial parents to claim a child as an exemption:
- If your decree is dated Dec 31, 2008 or before and it gives you the exemption without any preconditions, for example, being current on child support, then you can claim the child. You must file a paper return by mail and you must attach copies of the applicable pages from your decree along with the top page, showing the other parent's name and social security number as well as the signature page with the other parent's signature and date. These copies must be filed with your tax return every year you are taking the exemption.
- If your decree is dated Jan 1, 2009 or later the IRS will not honor the decree alone. You would need a signed Form 8332 from your ex to claim the exemption.
The decree can order the custodial parent to provide Form 8332 under penalty of Contempt of Court. However if they fail provide the form you have to go back to court to enforce it. If the decree doesn't order the non custodial parent to complete Form 8332 and they refuse to sign it then cannot claim the child.
Absent a pre 2009 decree or Form 8332, the exemption automatically goes to the custodial parent. The Tax Code defines the custodial parent as the one that the child spent the most time with during the year. Add up the overnights if need be; the most nights wins. (Time spent away from home for school counts as time spent in the home of the parent with the most nights physically in the home.)
Under certain circumstances, the amount of your legal and accounting fees paid which can be attributed to maintaining or preserving income (not child support) may be tax deductible. Discuss with your accountant if your legal and/or accounting fees qualify as a deduction.
If you either pay or receive alimony also called spousal support there are tax ramifications. Spousal support (not child support) is taxable to the recipient and deductible for the payer. Occasionally a dispute will arise as to how much alimony was paid or received. Sometime the IRS will question the alimony amounts. For that reason it is very important to keep good records. If you fail to maintain adequate records you may lose the alimony tax deduction.
If you pay alimony you should keep the following records for at least three years:
- Original checks. Be sure to show on each check the month the payment represents.
- A list that shows the date, check number, amount and address where payment was sent.
- If you give cash obtain and retain a receipt signed by both the payer and the recipient.
If you receive alimony you should keep the following for at least three years:
- A photocopy of the check or money order received.
- A list that shows the date, check number, amount of payment, bank account the funds are drawn on, account number against which the check is drawn on.
- A signed receipt with signatures of both payer and recipient for any cash payment received.
You should be aware of the Recapture rule for alimony. It can get complicated so consult a tax professional if you think you are impacted as either a payor or a recipient of alimony.
Child support is never taxable nor is it deductible.
CHILD TAX CREDIT
If you have children who are under age 17 as of the end of the tax year, you may be eligible to receive a $1,000 tax credit per child on your tax return. A tax credit reduces your tax bill dollar for dollar, so for example, three qualifying children can reduce your tax liability by $3,000. The credit does not affect the exemptions you take for dependents. The credit is in addition to your exemptions. The credit is limited if your modified adjusted gross income is above a certain amount.
To qualify for the Child Tax Credit you must meet these tests:
- The dependent must be a U.S. citizen or resident. You can claim your child, stepchild, adopted child, grandchild or great-grandchild. Under a new definition of a "qualified child," you can also claim the credit for siblings, step-siblings and half-siblings that live with you. Foster children qualify if they were placed with you by a court or authorized agency. To claim the credit, children must live with you more than half the year and must not provide more than half of their own support.
- You must report each qualifying child's tax identification number (TIN) (usually the child's Social Security number) on your return.
From the IRS website: Tax Tip 2012-29
The Child Tax Credit: 11 Key Points
The Child Tax Credit is available to eligible taxpayers with qualifying children under age 17. The IRS would like you to know these eleven facts about the child tax credit.
- Amount - with the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under age 17.
- Qualification - qualifying child for this credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.
- Age - to qualify, a child must have been under age 17 - age 16 or younger - at the end of 2011.
- Relationship - to claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
- Support - to claim a child for this credit, the child must not have provided more than half of his/her own support.
- Dependent - you must claim the child as a dependent on your federal tax return.
- Joint Return - the qualifying child can not file a joint return for the year (or files it only as a claim for refund).
- Citizenship - the child must be a U.S. citizen, U.S. national or U.S. resident alien.
- Residence - the child must have lived with you for more than half of 2011. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.
- Limitations - the credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.
- Additional Child Tax Credit - if the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.
For more information, see IRS Publication 972, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant on the IRS website to determine if you're eligible for the Child Tax Credit. The ITA is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions
CHILD AND DEPENDENT CARE CREDIT
If you paid someone to care for your dependent under age 13 or your disabled dependent or spouse so that you could work or look for work, you may be able to claim the Child and Dependent Care Credit on your tax return.
The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return
To qualify for the Child and Dependent Care Credit you must:
- Have paid for care expenses in order to earn taxable income. If you are married both spouses must work either full or part time. Spouses who are full time students or incapacitated are excepted;
- Pay more than 50% of the household maintenance costs for a qualifying dependent;
- File your tax return jointly if married, unless the separation rules apply;
- Hire someone other than your child (under age 19 at the end of the tax year), your spouse, or a person you can claim as a dependent;
- Have qualifying expenses over and above any tax free reimbursements from your employer;
- Report on your tax return the name, address, and taxpayer identification number of the child care provider. If the care provider is a tax exempt organization the taxpayer identification number is not required.
Employment-related expenses that qualify for the Child and Dependent Care Credit include household services and expenses for care of the qualifying individual. Expenses of attending a daytime summer camp qualify for the Child and Dependent Care Credit if that is a reasonable means of providing care during working hours. However, overnight camp expenses do not qualify for the Child and Dependent Care Credit. A nursery school generally qualifies for the Child and Dependent Care Credit, though an elementary school does not qualify for the Child and Dependent Care Credit.
Child and Dependent Care Credits are allowed for $3,000 of expenses for one dependent's care and $6,000 for more than one dependent's care.
In order to claim the Child and Dependent Care Credit you must maintain as your principal home a household for at least one of the following qualifying persons who live with you:
Top Ten Facts about the Child and Dependent Care Credit
- A child under 13 years of age whom you claim as a dependent;
- Your spouse if your spouse is physically or mentally incapable of caring for himself or herself;
- A person who is physically or mentally incapable of caring for himself or herself regardless of age
From the irs.gov website, 2013-34, March 15, 2013
- If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.
- You can claim the Child and Dependent Care Credit for "qualifying individuals." A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.
- The care must have been provided so you - and your spouse if you are married filing jointly - could work or look for work.
- You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.
- Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.
- This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.
- If your employer provides dependent care benefits, special rules apply. See Form 2441, Child and Dependent Care Expenses for how the rules apply to you.
- You must include the Social Security number on your tax return for each qualifying individual.
- You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.
- To claim the credit, attach Form 2441 to your tax return. If you use IRS e-file to prepare and file your return, the software will do this for you.
For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses. You may download these free publications from http://www.irs.gov or order them by calling 800-TAX-FORM (800-829-3676).
EARNED INCOME CREDIT
The earned income credit (EIC) is a tax credit for some people who work and have earned income under a certain amount. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EIC may also give you a refund.
To qualify for Earned Income Tax Credit or EITC, you must have earned income from employment, self-employment or another source and meet all of the following rules:
- Have a valid Social Security Number
- Have earned income from employment, self-employment or another source
- Cannot use the married, filing separate filing status
- Must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien
- Cannot be the qualifying child of another person*
- Cannot file Form 2555 or 2555-EZ (related to foreign earned income)
- Your Adjusted Gross Income and earned income must meet the limits shown on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page
- Your investment income must meet or be less than the amount listed on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page.
If you are married and file a joint return with your spouse, your spouse must also meet the EITC rules for everyone.
Rules for Workers without a Qualifying Child
- You (and your spouse, if filing a joint return) must have lived in the United States for more than half the tax year
- Either you or your spouse, if filing a joint return, must be at least age 25 but under age 65
- You (or you spouse, if filing a joint return) cannot qualify as a dependent of another person.
You may be eligible for the earned income credit (EIC) for the tax year 2013 if:
- $46,227 ($51,567 married filing jointly) with three or more qualifying children
- $43,038 ($48.378 married filing jointly) with two qualifying children
- $37,870 ($43,210 married filing jointly) with one qualifying child
- $14,340 ($19,680 married filing jointly) with no qualifying children
Tax Year 2013 maximum credit:
- $6,044 with three or more qualifying children
- $5,372 with two qualifying children
- $3,250 with one qualifying child
- $487 with no qualifying children
Investment income must be $3,300 or less for the year.
Preview of 2014 rates:
You may be eligible for the earned income credit (EIC) for the tax year 2014 if:
- $46,997 ($52,427 married filing jointly) with three or more qualifying children
- $43,756 ($49,186 married filing jointly) with two qualifying children
- $38,511 ($43941 married filing jointly) with one qualifying child
- $14,590 ($20,200 married filing jointly) with no qualifying children
Preview for Tax Year 2014 maximum credit:
- $6,143 with three or more qualifying children
- $5,460 with two qualifying children
- $3,035 with one qualifying child
- $496 with no qualifying children
Investment income must be $3,350 or less for the year.
The American Tax Relief Act of 2012 extends the relief for married taxpayers, the expanded credit for taxpayers with three or more qualifying children and other provisions to December 31, 2017.
INCOME TAX EVASION BY SPOUSE
For more information on whether a child qualifies you for the EITC, see IRS Publication 596
If your spouse knowingly cheated on your joint return to evade taxes, you might not be held responsible. Effective July 22, 1998 a new tax rule went into effect whereby if you are divorced, legally separated or have been living apart from your spouse for at least 12 months, and you were unaware that your spouse lied on your joint tax return you can file papers that would compute your tax liability separately. If you have been audited and you believe this rule applies to you contact a tax specialist who has experience with this type of matter.
From the IRS website Tax Tip 2012-23, February 3, 2012
Top Five Tips for Recently Married or Divorced Taxpayers with a Name Change
If you changed your name after a recent marriage or divorce, the IRS reminds you to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.
Here are five tips from the IRS for recently married or divorced taxpayers who have a name change.
- If you took your spouse's last name -- or if you hyphenated your last names, you may run into complications if you don't notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can't match the new name with their Social Security number.
- If you recently divorced and changed back to your previous last name, you'll also need to notify the SSA of this name change.
- Informing the SSA of a name change is easy. Simply file a Form SS-5, Application for a Social Security Card, at your local SSA office or by mail and provide a recently issued document as proof of your legal name change.
- Form SS-5 is available on SSA's website at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices. Your new card will have the same number as your previous card, but will show your new name.
- If you adopted your spouse's children after getting married and their names changed, you'll need to update their names with SSA too. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number - or ATIN - by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. Form W-7A is available on the IRS.gov website or by calling 800-TAX-FORM (800-829-3676).
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