There are a few financial complications when divorcing your spouse. You should be correctly informed about your filing status as well as your exemptions and deductions when preparing for the tax season. First, you have to understand that the marital status for tax filing is set as of the last day of the year (December 31). According to the IRS, you are considered a married couple for the whole year if you are separated but “have not obtained a final decree of divorce or separate maintenance by the last day of your tax year.” If you were to still be married on December 31, then you and your spouse can file a return with the status “married filing jointly.” In most cases, “married filing jointly” is a financially beneficial move but be weary of also being jointly liable in the event of an audit. Once you have confirmed your filing status, you can look further into what exemptions and deductions you qualify for.
In the event where you and your spouse share a child, the right to claim your child as a dependent belongs to the custodial parent. The IRS explains a custodial parent as “the parent with whom the child lived for the greater number of nights during the year.” The number of nights in which the child lived with a parent is determined by the child sleeping at that parent’s home, regardless of whether he/she is present or by the child being in the company of the parent, when the child does not sleep at a parent’s home (i.e. parent and child are on vacation together). If both parents spend an equal amount of time with their child, then the parent who pays for child support can claim the child as a dependent. If, however, neither one of the parents pay for child support, the parent who has the higher adjusted gross income is the custodial parent. If you are the parent who has to pay for child support, that child support cannot be deducted. However, there may be certain expenses for children that are deductible such as qualifying childcare expenses, healthcare expenses for minors, college tuition, and school expenses for adults. There are also two federal options that can be helpful and allow you to deduct up to $8,500 total. These options are 1) the Tuition and Fees Deduction and 2) the American Opportunity Tax Credit.
While you cannot deduct from your child support, you can deduct from alimony. Only under these circumstances are you allowed to deduct alimony: 1) payments are made pursuant to a written agreement/judgment, 2) when you are not members of the same household, provided that 3) the payments are not child support, which is determined by a three-part payment analysis, and 4) the payments cease upon your ex-spouse’s death. When you are obligated to make payments under this set of rules, you can probably deduct the payments from your income. These payments are not taxable income to the recipient, and therefore, not tax deductible to the payer. However, being the spouse who pays for alimony, even if you don’t itemize your deductions, will ultimately lower your tax bill.
Unfortunately, divorce attorney fees are unlikely to be deductible. However, there are some costs that you may incur as a result of your divorce that can be deductible. There is a way you can deduct certain fees, and that is only if you plan to itemize your deductions and your total miscellaneous deductions that exceed 2% of your adjusted gross income. If you successfully exceed that 2%, you can deduct 3 types of fees: 1) fees you paid for tax planning (such as consultation with your CPA during your divorce to determine the best property settlement payout), 2) fees you paid to obtain taxable income (such as your attorney fees for collecting spousal support, if you are the recipient), and 3) fees you paid for securing an interest in a qualified retirement plan (such as those paid to divide your and your ex-spouse’s defined contribution plans). If you don’t itemize your deductions or if your deductions do not exceed 2% of your adjusted gross income, then you cannot deduct any of those fees.
It is always safe to consult with a tax attorney who can better judge your situation. Know that going through a divorce also impacts your life financially. Have a good understanding of all your finances as well as your spouse’s finances, in the event you both decide to file jointly. Do not hesitate to ask for professional help in order to maximize your tax returns!