When it comes to absolutes in life, death and taxes are always at the top of the list. In divorce, although death may not come with it, there are tax implications that need to be considered.
The degree of how taxes will influence you after your divorce depends on factors such as if you have minor children from the marriage, child and spousal support orders, if you owned a home during the marriage, and of course, your filing status.
When you are married, the two primary filing statuses are Married Filing Jointly and Married Filing Separate. Now that you are moving to an unmarried status, depending upon your situation, you will file as Single or Head of Household.
To file as Head of Household you are required to meet three specific tests including:
1. Being unmarried or considered unmarried on December 31 of the tax year.
2. You paid more than half of the costs associated with keeping up the home for the tax year.
3. A child or other qualifying person resided with you in the home for over half of the tax year (that person must be able to be claimed as a tax exemption by you or your spouse).
It is also important to note that is you and your spouse were living in the same household on December 31 of the tax year and were not legally separated at that time, you will still be required to file as married joint or married separate (unless you meet the requirements for Head of Household above, thus allowing you to file accordingly).
If you are legally separated on December 31 of the tax year you are considered unmarried, thus you will need to file as Single or Head of Household (if you meet the requirements).
In the end, the common result is that tax rates generally get higher according to the tax filing status. Typically, married filing jointly has the best tax rates, followed by Head of Household, Single and Married Filing Separately.
What happens to child support orders?
When it comes to support orders (child and/or spousal), there are certain considerations you will need to plan for. Child support, for instance, is not included in the taxable income of the person receiving the suppor and is not tax deductible for the person required to pay it. Spousal support, on the other hand, is included as taxable income for the person receiving it and is tax deductible for the person required to pay it.
Although child support isn’t taxable income, nor is it tax deductible, there are two tax considerations that may apply. The first is determining who will be the party to claim the child or children as their exemption when they file their taxes. When there is one child, this could certainly be a point of argument between the parties. When there are multiple children, though, it is not uncommon to split the child exemptions between the spouses. This approach, though, may not always be the best as when one spouse’s income is significantly higher than the others, splitting the exemptions could result in lost opportunities for tax savings. If you are facing this scenario, it is strongly recommended that you consult with a professional tax advisor to determine the best path.
Another area related to children is the Child Care Credit. Under the Child Care Credit, the custodial parent of the children under 13 years of age is entitled to claim a credit between 20 to 30 percent of the cost of work related child care. This credit does have a maximum; thus it is important to check on the current year’s tax rules.
Finally, if you owned a home during your marriage and it was your primary residence for at least two of the past five years when you sell it, you are able to exclude up to $250,000 for the gain if single and up to $500,000 if married, from your taxable income. Where the challenge comes in is when you have lived in the house as your primary residence for at least two of the past five years and in the divorce, one spouse moves out and the other remains in the house. If this continues for three or more years, the house is no longer considered your principal residence, thus if you sell it and realize a gain from the sale…it will be subject to being taxed (there have been some new tax laws that are intended to address this specific issue; thus counting time the spouse resides in the house counting as your residence for the two-year residence requirement).
In the end, there are many factors that you need to consider when it comes to taxes and your divorce. Due to many of the matters being tied to the marital status on December 31, it is recommended that the parties take time to consider whether or not they should make their divorce effective prior to or after the end of the year.