Married or soon-to-be divorced spouses cannot escape tax complications. Divorce legal strategies can have different financial consequences.
Filing status impacts most divorced couples. Married couples usually file as married filing jointly or married filing separately. The categories for the year that the person becomes divorced are single or head of household.
A person is classified as unmarried for the entire tax year if the decree is issued before the last day of the year. This has negative consequences because it imposes new tax brackets and reduced standard deductions and personal exemptions.
However, filing as the head of a household has advantages because it allows a higher standard deduction and better tax brackets. To qualify, the spouse must be unmarried, pay over half of the expenses of home upkeep and have a dependent child or family member. This taxpayer is also eligible if they filed a separate return, paid over half the costs for home upkeep, did not live with their spouse in the same residence for over six months, provided the main residence for the dependent child and may claim a general exemption for the child.
Only one of the spouses may claim a qualifying child on their taxes. The custodial parent usually claims this child. The noncustodial child may sometimes claim this child if the parents are divorced or lived apart for six months, paid over half of the child support for the year, the child is in the custody of one parent and the custodial parent executed a waiver allowing the noncustodial parent to claim the dependent.
Alimony is usually deductible for the paying spouse and must be reported as income by the receiving spouse. However, an alimony recapture rule prohibits the paying spouse from deducting alimony.
Recapture occurs when the payments for the third year are $15,000 less than the total alimony for the second year. When the payments for the second and third year are reduced significantly, recapture may also govern.
Alimony is strictly defined as payments from one spouse to the other under a divorce decree, written separation agreement or a court order. These payments must be in cash, cannot continue beyond the death of the receiving spouse or constitute child support. The spouses cannot live together. An experienced attorney can help navigate these issues. They can help seek a practical and fair decree.
Source: D Magazine, "Divorce doesn't mean it's over...yet," By D Partner Studio, Oct. 23, 2017