When you file for divorce, taxes are probably the last thing on your mind. Unfortunately, divorce has significant tax consequences, especially if there are minor children involved. Because the IRS does not recognize concepts such as 50/50 custody, you need to be aware of the tax implications of finalizing your divorce and maintaining custody of your children.
Dependent Exemptions
The Internal Revenue Service allows taxpayers to claim exemptions for “qualifying children.” Under IRS rules, you can only claim a dependent exemption if a child lived with you for more than half the year. For example, if you had physical custody for seven months and your ex-spouse had physical custody for five months, you would be entitled to the exemption.
The rules are a bit trickier for couples who divorced during the tax year. If you were married until July 1, for example, you need to determine how many nights your spouse spent with each parent between July 2 and December 31. If your child spent more nights with you than your ex-spouse, then you have the right to claim the dependent exemption.
In most cases, a child must be under the age of 19 at the end of the tax year to count as a qualifying child. However, there are two exceptions. If your child is a college student, the age limit is 24. There is no age limit if your child is totally and permanently disabled, according to IRS Publication 501.
Adjusted Gross Income and Dependent Exemptions
In rare cases, a child spends an equal number of nights with both parents. When that happens, the spouse with the higher adjusted gross income (AGI) has the right to claim the dependent exemption. Remember that gross income and adjusted gross income are not the same thing.
If you have a gross income of $60,000 per year and your ex-spouse has a gross income of $70,000 per year, don’t assume that your ex-spouse is the one entitled to the dependent exemption. Adjusted gross income refers to gross income minus any allowable deductions. If your ex-spouse deducts alimony payments, one-half of his or her self-employment taxes, or contributions to certain retirement accounts, you may end up having the higher AGI.
IRS Form 8332
Just because you are entitled to the dependent exemption doesn’t mean you have to take it. If you want to give the exemption to your ex-spouse, fill out Form 8332, which is a written declaration used to assign dependent exemptions to a noncustodial parent. Your ex-spouse must attach the completed form to his or her tax return when it is time to file.
Tax Implications of Divorce
Depending on the terms of your settlement, divorce can have a significant impact on your tax situation. If you agree to sell property and split the proceeds, you may have to pay a big tax bill when the sale is final. Although the person paying alimony can deduct those payments from his or her gross income, you cannot deduct child-support payments. Your divorce can even affect your ability to file as head of household, increasing your tax liability for the year.
Because divorce complicates some tax issues, it’s important to seek assistance from your attorney before you file a tax return. The San Antonio divorce attorneys at Wilson Brown, PLLC, are here to answer your questions. Call us at (210) 787-4637 to schedule a free and confidential case review.
