Tax season is upon us, and many divorcing couples need to think about what to do now, and what they should know for the future.
1. Consider filing a joint tax return during your divorce.
If you are married there are two choices – married filing jointly or married filing separately. However if your spouse is a bit “aggressive” with his or her deductions and you sign that return, you will also be liable for any future tax balances and penalties, so be cautious.
When filing separately the same income is subject to a higher tax, which is a penalty of sorts. Also certain deductions are disallowed. In the case where you have lived in separate residences for more than 6 months in the calendar year, and you have at least one child living with you for more than 6 months, you can file as Head of Household. Your spouse would have no choice but to file separately unless he or she has had a child living with them for more than 6 months. For more details you may review the IRS guidelines.
2. Dependent tax deductions are worth more than most know.
You may agree to alternate years for claiming your children as dependents on your tax return. However the custodial parent (the one who has more than 50% of the overnights) is by tax law entitled, and for those that go along with it, many of which are typically overlooked. Details for dependents can be found in IRS Publication 501.
In addition to that deduction (properly termed the exemption), for children under the age of 17 there is a child tax credit. That will reduce your tax by $1,000 per child. Also consider the child care credit (expenses for day care while you work). This can not be traded, and is lost if you pay it and your former spouse claims the exemption for that child.
For older children, the college credits are limited to the parent claiming the dependent deduction. So if you are considering negotiating and allowing a non-custodial parent to claim the children (which you can do with IRS Form 8332), also consider the child care credit, child tax credit and college credits. This one decision can amount to a considerable tax savings, or loss, until your children reach the age of 24.
3. Alimony is subject to tax as income, child support is not.
If you are separated and receiving support, it is not considered alimony because you are still married. It is not taxable.
After the divorce, support paid due to the difference in income is alimony. It is taxable to the recipient and tax deductible to the payor. There are specific rules. The basics include the payment being in cash and ceasing on the death of the recipient. It is also not considered alimony if there is a payment reduction that coincides with a child growing older. That would be reclassified as non-taxable child support. Another important tax consideration is deduction of legal fees for divorce. The general rule is that it is only tax deductible if paid to facilitate receipt of taxable income, such as alimony. In order to take that deduction, your attorney must segregate the amounts allocated to alimony in their billing statements. Complete IRS guidelines for alimony and complete divorce regulations can be found in the IRS Publication 504.
4. THE most important pre-divorce action – get a copy.
It may not be so easy to get a copy of a jointly filed tax return later on and it is one of the cornerstones of the divorce process and negotiations.
If your return is professionally prepared, you can easily go back to the accountant or preparation service and ask for a copy. However if your spouse prepares the return on his computer and files it electronically, obtaining a complete tax return copy could become challenging. While the Internal Revenue Service does provide copies, when it is a joint tax return, both signatures are required on the request, Form 4506. An alternate strategy if your husband has prepared the joint return is to order a tax transcript from the Internal Revenue Service. Although that document is limited to line item entries, it can be used to confirm income and expenses, and the validity of a tax return presented by your spouse down the road, if it becomes necessary. You may order the transcript from the Internal Revenue Service, also using Form 4506. You will notice this form requires only one signature.
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