One of the major financial impacts related to your recent or pending divorce is the effect it has on the filing of your taxes. Navigating these difficult questions can be a minefield, so here’s a look at some of the more common questions you may face.
Child Support and Alimony
There are several tricky considerations related to the tax impact of alimony and child support. Generally speaking, alimony payments are above line tax deductible, which means the deduction is applied even if you don’t itemize your tax returns. There are some exceptions, however. If your ex-spouse continues to reside with you for any reason after the divorce, then during that time, alimony is not deductible (see item no. 4 here. If you are the one receiving alimony, this is considered taxable income.
Child support, on the other hand, is tax neutral. It is neither deductible for the payor nor taxable for the payee. This is something you will want to consider when discussing the divorce settlement with your attorney, to see if it makes sense for you to try to have some of the money typically paid as child support instead shifted to alimony.
One final child related point is the status of child tax credits. The child tax credit is typically reserved for the custodial parent, meaning the parent with whom the child resides for most of the year. The custodial parent is also the only one who may file as head of household. There is an exception that allows the non-custodial parent to claim dependent tax credits, discussed in this article from the Wall Street Journal. Consult with your attorney to decide if this arrangement is one you should consider.
Head of Household and Earned Income Tax Credit
Both Head of Household status and Earned Income Tax Credit are available only to the custodial parent. In order to file as Head of Household on your tax returns, three conditions must be met:
- You paid more than half the cost of keeping up your home during the year.
- Your home was the main home for you and your children for half of the year.
- Your spouse hasn’t lived in the home for six months
While the custodial parent may release the child tax and dependent care credits to the non-custodial parents under certain conditions, the same does not hold true for the Earned Income Tax Credit. According to an FAQ on the IRS web site, “To claim the EITC, the child must have lived with the taxpayer in the United States for more than half of the year except for temporary absences. If this residency requirement is not met, your client may not claim the EITC by claiming his son as a qualifying child.”
If you need further information on these or any other issues related to your divorce, please contact one of our attorneys.