Tax Considerations When Preparing for Divorce

Although taxes may not be the first thing on the minds of many people going through a divorce, divorce has significant tax consequences that are worth considering.

Firstly, your marital status on December 31 determines a taxpayers filing status for the year. If you are divorced as of December 31, then you will generally be considered single for that year for tax purposes. If you are married as of the end of the year, you either will be considered as married filing jointly or married filing separately. Generally, the most beneficial classification is married filing jointly. Because of the way the tax code operates, it can often be financially beneficial to wait until the new year to seek a divorce.

Secondly, children are another important tax consideration. In order to determine child tax credits, tax forms ask about the number of children who lived with you during and after a divorce or separation. Most of the time, the custodial parent is entitled to child tax credits. However, divorce decrees can specify that a noncustodial parent can claim the tax deduction for the children. Depending on the income of the spouses, this can be beneficial for both divorcing parents.

Lastly but importantly, the tax code treats alimony and child support very differently and it is important to consider the distinction between the two when structuring a divorce settlement. Generally, child support is not considered to be taxable income nor is it a deductible expense. This means the spouse who pays child support cannot deduct this from his or her income, and the receiving spouse does not pay taxes on child support received. Alimony is deductible for the paying spouse, and the spouse who receives it will be taxed on the amount received.

Source: Personal Finance Bulletin, “Divorce and Income Tax: Untying the Knot and Counting the Cost,” Susie Bayer, 1/6/2011