Tax Implications After Divorce

A divorce is a life changing event in more ways than one. If there is an outstanding tax liability, if the parties have children, if the marital residence is to be sold, the tax issues do not end with the filing of the divorce decree. A few of the more common questions and issues are stated here.

Child Support and Alimony
Child support is not considered income for tax purposes, but alimony is considered taxable income. Alimony is also a deduction from gross income for the payor. In some states, the amount of alimony can affect the amount of child support paid, and may be taken into consideration when calculating child support. In those states, it is better for the child support recipient, from a tax standpoint to structure the payment of less alimony and more child support.

There are other issues relating child support and taxation. The biggest is obviously, who is entitled to claim the child for tax purposes? When exemptions, filing status and child tax credits are factored in, the person claiming a child for taxes will receive a tax benefit of several thousand dollars. In low income families, the earned income credit will be a huge consideration in the granting of a tax exemption to either party. But if one party earns substantially more than the other, it may be beneficial to allow the higher income parent claim the child or children and adjust the child support obligation accordingly. A number of different scenarios should be calculated to determine the best tax savings of both parties combined, and adjust child support to reflect the tax benefits.

Often, if there are an even number of children, the parties will each claim a child or children. If the number of children is odd, or a single child, the parties may alternate exemptions on the odd numbered child each year. The divorce decree should specify who claims the children for taxes, and if years are to be alternated, the years should be specified in the decree. The IRS uses Form 8332 Release of Claim to Exemption for Child of Divorces of Separated Parents, for this purpose. It is signed by the custodial parent, releasing the exemption to the noncustodial parent.

Income Tax Returns
The parties' marital status as of December 31 determines their filing status. If the divorce has not been finalized by the end of the year, the parties are entitled to file a joint return, though a divorce is in process, or they may file married but separate. If still married, parties should consider both scenarios before filing, to determine the best tax benefits received.

Both parties are responsible for the accuracy of the returns, and are normally jointly responsible for any tax liabilities while married. Even if the divorce decree requires that one party pay a tax liability, the IRS can seek collection from both. The other party will then be required to seek a post divorce motion to enforce the divorce decree. A spouse that truly did not know the tax liability of the other party may seek to obtain innocent spouse status from the IRS, but this is a difficult scenario to prove.