Divorce-101: About Taxes

         Divorce has obvious tax consequences. The most apparent is that each partner probably will be filing, at least for a while, returns as single taxpayers or heads of households instead of jointly.These different filing statuses immediately affect such things as tax rates and standard deduction amounts. Some tax break requirements also are determined by filing status.  

Filing issues can crop up even before a divorce is final. When a couple is going through the process, they sometimes opt to file separate returns. This could be costly, since joint returns generally produce a lower tax liability that do separate 1040s filed by a husband and wife. However, in some situations, separate returns could produce a better tax result.   In these cases, the couple’s best move is to compute their tax bill both ways to determine the most advantageous.  

Dependent decisions When children are involved, tax considerations get a bit more complicated.  

Taxpayers know well the value of dependents. Each dependent provides the filer an immediate subtraction from taxable income of several thousand dollars. But the tax break is allowed only if the dependent meets IRS eligibility requirements and those could change during and post-divorce.  

Other tax breaks, such as the child tax credit, educational deductions and credits and the dependent care credit, also are based on the taxpayer’s claim to the dependent.  

Generally, a taxpayer must provide most of the support for the dependent in order to take most tax breaks. However, in divorces, when that support is provided by the noncustodial parent, such payments do not necessarily mean that the parent is allowed tax breaks associated with the child or children. Rather, where the child spends most of his or her time, i.e., with the custodial parent, prevails when it comes to taxes.  

In amicable divorces, it’s not usual to see ex-spouses “trade” off the child dependency exemption. They can do so, and claim related tax breaks each tax year by filing IRS Form 8332.  

When there are several children involved, divorced parents sometimes split the dependent exemptions; tax experts, however, say this generally is not a good move. If one spouse’s income is substantially higher than the other spouse’s income, for example, each ex-spouse will be worse off because they will have missed a chance to maximize tax savings. Consult with your personal tax advisers to determine the tax-saving value of the exemption or exemptions for each spouse. The party who benefits most should claim all the exemptions and consider compensating the other spouse.