Divorce and How It Will Affect Your Taxes
Apr 28, 2015
Not everyone likes their ex, but everyone hates the tax man!
Who gets the house, who gets primary placement of the children and child support are usually the main topics in a divorce. What most people usually overlooks is how their choices will affect them when it comes to tax time. As you are negotiating your divorce, keep these tax issues in mind.
Married or Single Status?
For tax purposes, your marital status is not based on being married or single on the day you file your taxes. It is based on your marital status on December 31st. If you are looking to benefit from filing jointly for one more year, you have to hold off on your divorce until after the New Year. On the other hand, if joint filing has no benefit to you, you can finalize your divorce before the end of the year or file as married filing separately.
Claiming Kids as Dependents
The general rule is whoever has the child the majority of the year gets to claim the child on their taxes as a dependent. However, this rule rarely applies in the real world. Usually, the decision on who gets to claim the child for tax purposes is a part of the final divorce agreement. Obviously, being able to claim the child as a dependent has some value and will be used in negotiations. The two most likely outcomes are either one parent claims the child every year or some type of flip-flopping between the parents. However, there is a time when the divorce agreement does not apply. If a parent is behind on paying child support as of December 31st, that parent is not allowed to claim the child as a dependent even if by tax time they are caught up on child support. (Due to the Tax Cuts and Jobs Act, please see updated blog Divorce and the New Tax Reform)
Child support is just that - payments used to support your child, or so the government treats it as such. If you receive child support you do not have to claim it as income on your taxes. Obviously, not paying taxes on money received is a bonus. Conversely, If you pay child support you do not get to deduct the amount from your gross income. Not only do you have the expense of paying child support, but you also do not get the benefit of claiming it as a deduction.
Alimony is treated the opposite of child support. If you receive alimony, it is taxable income. Keep in mind taxes are not deducted from your alimony payments and you may owe in at the end of the year. If you pay alimony, you are able to deduct the payments from your gross income. Since alimony is taxed and child support is not, keep this in mind when you are negotiating child support versus alimony. (Due to the Tax Cuts and Jobs Act, please see updated blog Divorce and the New Tax Reform)
Talk to an Attorney
As you can see these tax issues should be considered when you are negotiating your divorce. The higher the tax bracket you are in, the more important your understanding of this should be. This is a great example of things you may not be thinking about when you are in the fog of negotiations but an experienced attorney will.
Pedersen Law Office offers free consults in all of our areas of practice and will meet with you personally to discuss your specific circumstances and see what options are available for you. Our law office serves the communities of Appleton, Neenah, Menasha, Oshkosh, Green Bay and their surrounding areas.