The end of a marriage is not only devastating, but it also leaves a number of financial and logistical issues in its wake. One of the main problems that many separating couples may need educate themselves about is how divorce will change their tax burden. Below are the following topics that might make the first year of tax-paying after divorce more complex—and how to deal with these changes.
The most apparent change on your tax return when you get divorced is the change in filing status. The IRS looks at whether you were married on December 31 to determine whether you need to file as a married or single payer. So, those who divorce late in the year are treated as unmarried for the entire year, while if you were divorced in the following January or later, you’ll still need to file your tax return as a married couple.
Claiming Children as Dependents
If you have children who qualify as tax dependents, then one important question will be which parent gets to claim the exemption for those kids. Not only do exemptions get you a reduction in taxable income, but they also help determine which parent can claim lucrative tax credits.
Generally speaking, if the court has designated you as your child’s custodian, then you can claim them as dependents. On the other hand, if there is no court order—or if the parents have agreed to some sort of joint custody—the IRS considers the parent who has the physical custody of the children for most of the year to be the custodial parent.
For parents who are splitting custody 50/50, this does not help. Since both parents cannot legally claim the same dependent, there are a couple of options for divorcing parents with joint custody.
First, if you only have one child, you can switch off years which parent claims the child as a dependent. Second, if you have more than one child, you can split up which child is claimed by which parent. Both of these options are legal.
If you agree to alimony payments, then the paying ex-spouse gets to deduct those payments. By contrast, the receiving ex-spouse must include them as taxable income.
However, all of that is going to change on January 2019 due to the new Tax Cuts and Jobs Act (TCJA). For payments required under divorce or separation instruments that are executed after December 31, 2018, the new law eliminates the deduction for alimony payments. Recipients of affected alimony payments will no longer have to include them in taxable income.
Child support is considered completely tax neutral, meaning that the payer cannot take a deduction for it, and the recipient does not need to pay taxes on it.
Take some time to educate yourself on what to expect from a financial and tax standpoint before your divorce is finalized. Even in the midst of a contentious and emotionally overwhelming divorce process, it is wise to know the tax implications you face.
For more information about your taxes post-divorce, contact Wakenight & Associates, P.C. and request a free consultation with our Illinois divorce attorney today.