Taxing issues in a divorce

Divorce brings with it numerous tax consequences to be aware of.  For example, dividing one’s pension or 401(k) account – when done in conjunction with the divorce – is generally a non-taxable event if divided pursuant to a Qualified Domestic Relations Order, but if that money is withdrawn after it has been transferred to the non-owning spouse, then it may be subject to income taxes.  Another example – alimony payments are includible as income to the recipient spouse and excludible as a deduction by the payer.

Custody brings with it tax-related issues, as well.  Generally, only the custodial parent may claim a dependency exemption on behalf of a child. The custodial parent for IRS purposes is defined as the parent with whom the child has lived for more than half the year.  In many cases, however, the dependency exemptions are alternated between the custodial parent and the non-custodial parent, or perhaps the custodial parent isn’t making enough of an income such that it would be more tax advantageous for the non-custodial parent to take the exemptions.  In order for the non-custodial parent to claim the child as a “qualifying” child, a few requirements must be met, including that over half the child’s support for the year must have been provided by one or both parents, the parents must be divorced or separated under a written agreement by the end of the year or have lived apart during the last six months of the year, and there must be a written declaration – IRS Form 8332 – by the custodial parent relinquishing the rights to claim the qualifying child to the non-custodial parent.  This form is generally filed by the non-custodial parent as part of his or her tax return.

This enables the non-custodial parent to not only claim the dependency deduction but also any child tax credit, which translates into potentially big tax benefits for the claiming parent.  In 2016, the dependency exemption deduction was $4,050 while the child tax credit was up to $1,000 for each eligible child, with a phase-out rule for high income parents.

However, the non-custodial parent cannot claim Head of Household filing status even in the years where they are claiming a qualifying child.  This is important because the standard deduction is bigger than if one were claiming as a single taxpayer.  So even in the years that the custodial parent relinquishes the dependency exemption, he or she can still obtain Head of Household benefits.

Tax issues are complicated – a divorcing party would be well-advised to consult with a tax accountant in conjunction with his or her settlement.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.