Tax planning for divorce begins at the moment of separation (or before if you haven’t told your partner). Many individuals are unprepared for the effect that separation has on their tax situation. Most divorcers (is that a word?) 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 (the one the child lives with (more details later)) 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 different child)
A. You are unmarried or “considered unmarried” on the last day of the year.
1. You are considered unmarried on the last day of the tax year if you meet all the following tests:
a. You file a separate return.
b. You paid more than half the cost of keeping up your home for the tax year.
c. Your spouse did not live in your home during the last 6 months of the tax year.
d. Your home was the main home of your child, stepchild, or foster child for more than half the year.
2. You paid more than half the cost of keeping up a home for the year.
3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she does not have to live with you.
4. 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)
Note: Head of Household has due diligence requirements, so a preparer will ask tougher questions, and the IRS is more likely to question this status – make sure you have your ducks in a row.
II. They may file Single if they obtain a divorce or separation agreement prior to 12/31 of the tax year. State law determines who is divorced or legally separated so talk to your lawyer about it.
III. They may file MFJ with their spouse and divide the refund. Talk to your lawyer about the division since state law may require certain things. Also, a good tax professional can help you understand the various rationales for how to divide it. Be aware that a judge technically cannot force you to file MFJ. The judge may not believe that but NO ONE can force you to sign a tax return you are not comfortable signing since you are attesting under penalties of perjury that it is all true and you may not be certain that your ex-spouses information is accurate. Talk to your lawyer AND a good tax dude if you don’t want to file jointly and are being pressured to do so.
Once divorced or separated there are a number of issues to consider. I’ll start with the biggie: Children.
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 parent’s 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 (these rules were different for per 2009 divorces so ask an expert if you have an older divorce). Only the custodial parent can release an exemption! ONLY a signed IRS form 8332 or similar statement may release the exemption. A judge can require you to do this, but the IRS will not enforce this order. If your spouse fails to provide it as ordered, they have to go back to the judge.
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 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 (mainly because the Child Tax Credit is the only one of these that does not REQUIRE the child to live with you more than half the year, which only the custodial parent can meet). Other items are less obvious…
Medical Expenses go to who paid them
Education Credits go with the exemption (custodial unless 8332 signed.)
It is CRITICAL that you pay attention to questions asked by software about where the child lives, how long, divorce etc. Failing to do this will cause a lot of trouble for both of you.
Child Support and Alimony:
Child Support is never taxed or deducted. For divorces finalized in 2018 and before, 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. Starting with divorces finalized in 2019 and later, Alimony is not deducted by the payer, nor taxed to the recipient. WARNING: It’s the date of the DIVORCE that matters, not the date of the payment. All divorces finalized in 2018 and before remain unaffected by the new law.
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!
STG Tax LLC 