A divorce will almost certainly affect the amount of income tax you have to pay each year. Once you've rejoined the ranks of single taxpayers, you are more likely to see a tax increase than a tax cut - especially if you are the non-custodial parent. While divorce and taxation can be complicated, you may be able to use perfectly legal strategies to reduce your tax burden. Knowing how tax law relates to divorce is an important step in sensible financial planning.
Head of Household Filing Status Has Advantages
After a divorce, you might be tempted to simply check "single" on your tax return. Before you do that, though, you'll want to consider whether you qualify for "head of household" status. To be eligible, you must live apart from your former spouse for at least six months, one or more children must reside with you and you must pay more than half the cost of supporting your children and maintaining your home. You might shave thousands of dollars off your taxable income by filing as a head of household.
You May Be Entitled to Tax Exemptions and Tax Credits
If you have children and you're the custodial parent, you are entitled to claim a tax exemption for each child. An exemption reduces your taxable income. You may give this exemption to your ex-spouse, if you wish, by filing Form 8832. If you are a custodial parent and pay college expenses for an older child, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit on your taxes. You may also qualify for the Child and Dependent Care Credit. Tax credits are desirable because you don't deduct them from your taxable income. Rather, tax credits directly reduce your tax bill. You can't transfer tax credits to your ex-spouse.
Alimony Payments Might Be Taxable
You'll have to pay taxes on alimony you receive from your former spouse if the payments meet the IRS definition of alimony. For example, if your payments are not made by cash, check, or money order, they aren't considered alimony for tax purposes. Also, if you file a joint tax return with your former spouse, your alimony for that year isn't taxable. To avoid paying taxes on alimony, you and your former spouse can designate in your divorce decree that the payments you receive aren't taxable in your income and aren't deductible from your former spouse's income.
A Property Settlement May Trigger New Taxes
If you transfer title to your house or some other property to your former spouse, you may be required to file a gift tax return, although you can probably avoid having to pay gift tax by claiming certain exemptions. If you sell certain kinds of property such as real estate or company stock as part of your divorce settlement, you might have to pay capital gains tax on any profit you realize from the sale.
You Might be Excused From Paying Back Taxes
If you filed joint tax returns during your marriage and your spouse prepared the returns, the IRS may hold both of you responsible if your spouse underpaid your taxes. The IRS can come after you both for back taxes and penalties. However, you might be able to convince the IRS to waive these taxes by using the "innocent spouse rule." You must be able to show that you were unaware of your spouse's actions.
A Divorce or Tax Attorney Can Help
The law surrounding divorce and taxation is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a divorce or tax lawyer.