Filing your taxes can be confusing for anyone. When you are divorced, additional financial challenges are added to the mix. This can add a new layer of confusion, making it difficult to file your taxes on your own. Karen Stampone, a CPA and Certified Divorce Financial Analyst, specializes in helping divorced individuals file their taxes. In this article, Karen and Tiffany Thomas Smith answer the most common tax questions asked post-divorce.
1. Who claims the children after a divorce?
Karen Stampone (KS):
Usually, the custodial parent gets to claim any qualifying children as dependents. However, the IRS does not use the same definition of custodial parent that family court does. In certain cases, your divorce decree might say that one parent has custody, but the IRS determines that the other parent should be able to claim the child for taxes.
For tax purposes, the custodial parent is usually the parent the child lives with the most nights.
If you feel that you should be able to claim the dependent, you’ll need to print and mail your return. You won’t be able to e-file. The IRS won’t allow two different people to e-file using the same dependent Social Security number (SSN).
The IRS will then send a letter to both of you to determine who gets to claim the exemption for the child. If you can’t agree on who claims the child, the tie-breaker rules apply. Under the tie-breaker rules, the child is a qualifying child only for:
- Whoever the child lived with the longest during the tax year
- The parent with the highest AGI (adjusted gross income) if the child lived with each parent for the same amount of time during the year
- The person with the highest AGI if no parent can claim the child as a qualifying child
- A person with an AGI higher than any parent if the parent can claim the child as a qualifying child but doesn’t
Child Custody and Taxes: What Can Be Claimed?
What can the custodial parent claim on their taxes? If they qualify, the custodial parent can claim these:
- Head of household filing status
- Child and dependent care expense exclusion or credit for any expenses paid
- Earned Income Credit (EIC)
The parent claiming the child for the tax year will be able to claim all of these:
- Child tax credit
- Additional child tax credit
- Credit for other dependents
- Any education expenses
Custodial parents can give the noncustodial parents the right to claim their custodial parent tax benefits. To do so, the custodial parent must send Form 8332: Release/Revocation of Release of Claim to the Exemption for Child by Custodial Parent to the IRS. The custodial parent must send Form 8332 with their return or with a Form 8453 after e-filing.
Tiffany Thomas Smith (TTS):
It is important to spell out your intentions about how the dependents will be claimed in your marital settlement agreement, custody agreement or support agreement. If you are married and divorce the terms can be addressed in the marital or property settlement agreement. For parents of children who were never married the agreements will be in custody and support. If the terms are not memorialized it can lead to a “race to file” to see which party will claim the child. There are times when the parent with primary custody will agree to permit the other parent to claim the child. Having a conversation with a professional as the tax planning before your agreement is signed is the best course of action. However, if you have not consulted with a financial and want to change the terms, if both parties agree the terms can often be modified.
2. Is there a dependency exemption?
Starting in tax year 2018, the TCJA (Tax Cuts and Jobs Act) eliminates dependency exemptions – including the child dependency exemption. However, the new law dramatically increases the standard deduction for individuals, single parents who can claim head of household, and married individuals. The TCJA also doubles the child tax credit, and the TCJA still allows non-custodial parents to claim the child tax credit, so long as the custodial parent executes IRS Form 8332.
As an attorney I advise my client to put every agreement in writing. That may include an agreement for the no-custodial parent or parent with less than 50/50 custody claiming the tax credit. Do not leave these discussions to interpretation. Include a statement in the agreement that specifies the “custodial” parent will agree to sign the appropriate I.R.S. tax documents to permit the “non-custodial “parent to claim the tax credit. Be sure to include a time frame which comports with I.R.S. tax filing deadlines.
3. What happened to alimony? Is alimony taxable?
Beginning Jan. 1, 2019, alimony or separate maintenance payments are not deductible from the income of the payer spouse, or includable in the income of the receiving spouse, if made under a divorce or separation agreement executed after Dec. 31, 2018.
This also applies to a divorce or separation agreement executed on or before Dec. 31, 2018, and modified after December 31, 2018, if the modification:
- changes the terms of the alimony or separate maintenance payments; and
- states that the alimony or separate maintenance payments are not deductible by the payer spouse or includable in the income of the receiving spouse.
On the other hand, generally alimony or separate maintenance payments are deductible from the income of the payer spouse and includable in the income of the receiving spouse, if made under a divorce or separation agreement executed on or before Dec. 31, 2018, even if the agreement was modified after December 31, 2018, so long as the modification is not one described in the preceding paragraph.
The tax effect of alimony is conditioned on several factors. The date of implementation of the alimony order will determine if it is taxable to the recipient and deductible by the payor. Order entered or agreements made after December 31, 2018 do not have a tax effect for either party. This change has substantially changed settlement negotiations in divorce matters.
If you have questions about filing your taxes post-divorce, contact Karen’s team at Stampone and Associates today. If you are planning a divorce and have questions about how the structure of your divorce could impact your future taxes, contact Tiffany Thomas Smith to discuss your unique situation.
Karen Stampone is a Certified Divorce Financial Analyst trained in Collaborative Law. Karen offers 30+ years of tax experience staying current and informed of all changes in the Code that affect you. Her practical no nonsense approach teamed with her exceptional organizational style creates a workable method for success. For more information visit, www.stamponeassociates.com.
Tiffany Thomas-Smith has been in practice for over 15 years. She is the founder and owner of The Thomas Smith Firm, P.C. The firm was established to provide a client-centered firm dedicated to family law, small business and estate planning issues. Ms. Thomas-Smith is licensed and has worked with well established firms in Pennsylvania.
The content of this article does not constitute legal or financial tax advice. For legal advise, contact an attorney licensed in your state. For advise specific to your tax situation, contact a tax accountant.