When you divorce, much in your life changes, including your payment of taxes. Your filing status affects elements of your taxable liability. One important concept to keep in mind is that your divorce is a private contract with your former spouse; it does not bind any other party, including your creditors and the Internal Revenue Service.
The IRS notes on its website, “If you are divorced, you are jointly and individually responsible for any tax, interest, and penalties due on a joint return for a tax year ending before your divorce.”
Again, because your divorce agreement or settlement is a contract that does not involve the IRS, they remind divorcing couples that both parties are liable for any taxes due, even if the agreement states otherwise. The IRS is unconcerned about the fine points of your settlement; it just wants its money.
Married Filing Jointly or Married Filing Separately
If you were married on December 31 of a year, the IRS recommends you calculate your tax obligation both jointly and separately in order to determine which provides the best economic results.
If you file jointly, you both include all of your income, exemptions, deductions and credits on the return. If you file separately, you should each report only your own income, exemptions, deductions and credits on your individual return.
You both cannot claim the same exemptions or deductions, so these are the items that need to be worked out carefully and precisely in a settlement agreement. How you file your state taxes and if you live in a community property state will also affect your filing of your federal taxes.
Alimony or Maintenance
If you are receiving alimony or maintenance, you need to report it as taxable income. If you are paying spousal maintenance, you receive the benefit of a deduction.
Because it is treated as income for the receiver, you will need calculate whether you need to make estimated tax payments on a quarterly basis or increase you work income withholdings (if you have income withholdings).
If you fail to have sufficient income withheld or pay estimated taxes, you could owe a penalty and interest on the underpayment of your tax.
Unlike spousal support, child support is neither taxable income, nor does it entitle the payor to an exemption. Eligibility for the child’s exemption is typically determined by which parent is the custodial parent.
Whether you are the custodial parent for the IRS is generally determined by where the child spends the most number of nights during the year. Parents also can voluntarily transfer the dependency exemption and child tax credit, but special rules apply and additional form must be filed.
Even this seemingly straightforward determination can become complex, if a parent works at night, if the child spends equal amounts of time with each parent and then goes to summer camp.
You may have to alternate which parent claims the exemption from year to year or if you have an even number of children, split their exemption, with each spouse receiving part of the total exemption.
Costs of Getting a Divorce
While you cannot deduct your legal expenses from a divorce, you may be able to deduct the cost of tax advice in connection with a divorce and the portion of your legal fees used to get alimony or maintenance. This includes the costs of contesting maintenance or alimony by the payor or the recipient
Other possible deductions may include fees for appraisers, actuaries and accountants for services in determining your correct tax or in helping to obtain alimony or maintenance.
You must itemize your deductions and these expenses are subject to the 2 percent-of-adjusted-gross-income limit.
Like a Snowball
A divorce settlement is necessarily complex, as it controls how one household becomes two. All of the myriad details that can be worked out every day in an ad hoc fashion in a unified household must be explicitly considered and addressed by a divorce agreement.
Because so many daily activities are interconnected, the better your agreement anticipates potential issues, the better you and your former spouse will be able to raise your child or children. Taxes are just one more piece of the complex agreement that will disentangle your finances from those of your former spouse.
The complexity of the tax code requires that you have a professional to assist in a comprehensive review of your financial situation and how your divorce will change your assets, income and debts. You should discuss all of this issue with your divorce attorney before your divorce agreement is finalized.