Going through a divorce is a trying time for couples where issues such as custody and division of assets can be difficult to cope with. These issues also have an impact on taxes where dealing with the IRS and determining filing status can complicate the entire process further. For the most part, an individual’s filing status is determined by his or her marital status at the end of the year.
If the divorce is not finalized by the end of the year, couples can still enjoy the benefits of filing married filing joint as long as both agree. This attracts a lesser tax when compared with filing married filing separate. The only benefit from filing separately is that it protects one spouse from the other’s tax liability.
Determining the filing status
Divorce attorneys are also of the opinion that choosing the filing status of filing married filing separate makes couples lose out on several benefits. A spouse that opts for itemized deductions can end up in a favorable position. A spouse that pays the mortgage bills can benefit more due to mortgage interest deduction. Some of the other benefits both parties can lose include tuition and fees deduction, student loan interest, and in some cases, Dependent Care Credit and Earned Income Credit.
According to divorce attorneys, filing joint does not offer protection on tax liability since the IRS holds both parties responsible. Failure to pay taxes can lead to both spouses having their wages garnished. However, there are several advantages of filing as Head of Household if you are still married and your spouse has not lived in the home for the last six months of the year. In addition, the home must be the primary home for you and at least one child for over half the year.
Child support and alimony
According to divorce attorneys, tax issues can often be more complex than matters like alimony. Custodial parents can claim a dependent exemption of up to $3,950 per child while the other spouse can only claim dependent exemption and child tax credit if they have the consent of the custodial spouse. IRS Form 8332 Release of Claim to Exemption for Child of Divorced or Separated Parents must be signed by the custodial parent, which must be attached to the noncustodial parent’s income tax return.
In the case of child support, there are no tax issues since child support is non-deductible for the payer and is not treated as taxable income for the recipient. Alimony is another important issue when it comes to taxes. It is taxed at standard income rates for the recipient while the party making the payment can claim a deduction.
Multimillion dollar divorces and the IRS
Multimillion dollar divorces like that of Harold and Sue Ann Hamm can be even more complicated when it comes to taxes. A judge ordered the CEO of Continental Resources to pay his wife $995.5 million. The IRS will get a piece of it from both sides of the deal although they might not get much at the beginning. Divorce attorneys say that it isn’t necessary to face major tax bills right after a multimillion dollar divorce. The bottom line is to remain vigilant and take care of problems that can occur later.