Many people may not think about the effect divorce may have on them in terms of taxes. However, changes in filing status can have some significant consequences at tax time. The same is true for claiming dependents and dividing assets. So, just what kind of effect will your pending divorce, child support and alimony issues have on your bottom line on April 15th this year?
The rules relating to divorced taxpayers don’t usually change from year to year. Nonetheless, the difficulty comes in determining how divorce will change the way you normally file your taxes. A concern for many couples facing divorce is how it will affect their tax refund or tax liability. Here are a few guidelines that may make tax season a little easier. (This information is not meant to substitute for the legal advice of an accountant or tax attorney).
Determining marriage and filing status
If your divorce is finalized between January 1st and April 15th of this year (2014), you will still consider yourself married for purposes of your 2013 taxes. If your divorce was finalized at any time during 2013, even in December, you cannot file as married, even if you were still married during most of the year.
The only other option is to file as “head of household,” which may save you money. Although this status was meant primarily for single people, those who are in the middle of a divorce may be able to qualify for this status as well. The requirements are that you lived apart from your spouse for at least the last 6 months of the year and paid over half the costs of maintaining your primary residence. You must also be able to claim your child (if you have one) as your dependent.
Dividing Marital Assets
One consolation is that you won’t have to pay income taxes on the assets that are transferred to you during your divorce. But if you are awarded a residence in divorce order or settlement, it won’t be tax-free, because of the capital gains tax. One factor to remember, if it applies to you, is that if you moved out of the house before the divorce was final, and then received the house as part of the settlement, you will still be able to claim the house as your primary residence.
Determining who can claim the children as dependents
Contrary to what you may think, the fact that you have equal time with the kids doesn’t make them your dependents. Custody arrangements have become creative and even complicated in some cases. What makes it worse is that the terms “custody” or “custodial parent” have not adequately been defined for tax purposes.
The general rule is that if you were awarded sole custody by the court, you can claim the children as dependents. However, if there is no agreement or order, or if custody is joint, the parent with physical custody the majority of the year wins. But what if the custody is split equally? Since both parents cannot claim the child as a dependent at the same time, there are really only two options. If the couple has more than one child, they can each claim a child. If there is only one child, the parents can split the dependency.
The benefits of alimony at tax time
For the person paying alimony, this expense will ultimately lower your tax liability. Because alimony is what is a called an “above-the-line deduction,” you still get the deduction whether or not you itemize. The catch is that the payments must be pursuant to an actual agreement or court order and cannot include child support. Child support payments are always considered tax-neutral, which means those payments do not affect your taxes in any way.
As always, call our office if you have questions about divorce and taxes in Alabama. (866) 345-2528.