How Divorce Affects Income Tax Filing

How Divorce Affects Income Tax Filing

Posted on April 10th, 2019

For many, tax season and filing are a burden all their own, however, add divorce to the mix and it can become an even more complicated process. The newly enacted Tax Cuts and Jobs Act (TCJA) impacts tax filing with some new twists.  

Your marital status at the end of the year will determine how you file your tax return. If your divorce has been finalized, you will file separately from your spouse and can file as Single or Head of Household. If you are in the midst of your divorce, but it has not been completely finalized you can only file as Married Filing Jointly or Married Filing Separately. It is important to understand that in community property states such as Nevada, in order to correctly file Married Filing Separately, both spouses are required to report his one half of his income and one half of his spouses’ income.  Just reporting your own income is not correct. Once the divorce is finalized, both parties are considered not married for the entire year.

An example, your divorce was finalized prior to the end of the year, you can file as Single or Head of Household. There are requirements to be able to file as both.

To be able to file as Head of Household, the following is required:

  • Proof that  you are unmarried or considered unmarried on the last day of the year.
  • You paid more than half the cost of keeping up a home for the calendar year
  • Your  home was the main home of your child, stepchild, or foster child for more than half the year
  • Your spouse didn’t live in your home during the last 6 months of the tax year

To file as Single, you are considered single or unmarried on the last day of the year and you do not qualify to file as Head of Household.

Overnights are the deciding factor for the child care credit and head of household status, as agreement of the parties cannot shift these.  It is based solely on the majority of overnights, and if that cannot be determined, then it would be whichever parent makes more money. It is now more important than ever to have a tie breaker rule in the divorce agreement. The child will be a qualifying child of the parent with whom the child resided longest during the year. If the parents have an equal timesharing arrangement consider giving one parent 183 overnights so the tiebreaker is written into the agreement.  This can be rotated year by year.

An advantage of filing as Head of Household is the ability to claim a higher standard deduction of $18,000 instead of $12,000 standard deduction for a single filer.  There is now  a standard deduction for  $12,000 for single files, $24,000 for married couples, and $18,000 for head of household. This appears to be favorable, but losing the dependent deduction offsets this benefit.

The child tax credit for a qualified child will increase from $1,000 per child to $2,0000 with $1400 of that sum being refundable. The child tax credit for a child of 16 years or younger at the end of the tax year goes with the dependency deduction.  The new tax act eliminates the dependent exemption itself, but the definition of a dependent remains the same for you to claim the child tax credit or other child or dependent related tax benefits. There is no change to the dependent care credit but only the custodial parent can claim a tax credit for dependent care expenses so the label of a parent being able to claim a specific child as a dependent is still important.

If the divorce agreements specify joint physical custody of a child or children,  the court will generally alternate the dependency exemption annually. If the agreements don’t specify, only the custodial parent can claim a child.  If there is joint custody with no specification, each party may try to claim the exemption, but the IRS will not allow this. The IRS typically assumes that the parent with primary custody will claim the exemption. If there are 2 or more children between the couple, the parties can decide to divide the exemptions between them. The parent with the higher income generally gets a larger tax break from claiming dependent exemptions and therefore, the couple may decide to allow that parent to claim the children. Remember, even if you don’t have custody of your child, you still have the right to deduct his or her  medical expenses if you paid for them.

Prior to the new tax law, alimony payments were deductible and needed to be reported on the return. With the new tax law, alimony payments, for both the payer and payee are different. For all divorces not finalized prior to the end of 2018, your tax treatment will be different. Those who pay alimony will no longer be able to claim those payments as a tax deduction and will likely have a much higher tax burden. Those who receive alimony, on the other hand, will no longer be required to report  it as taxable income. This is a big new change in the tax law.

Modifications of pre-December 31, 2018 decrees that occur after January 1, 2019, will continue to be deductible unless the modification order expressly provides the modification is nondeductible and non-includable. This will reduce the cash flow of both the payor and the payee.  As to prenuptial and postnuptial agreements that have alimony provisions that provide for specified amounts of alimony to be deductible to the payor and includable as income to the payee, it is unclear whether courts have the power to reform these agreements based upon changes to the tax laws.