During a divorce, spouses usually concentrate on property division, child custody and support. However, like other life-altering events, it has important tax consequences requiring planning and impacting negotiations as well.
A spouse's tax filing status depends on the date that the divorce is completed. If the divorce is completed on or before December 31, the spouse cannot file a joint return. If the new year begins before the divorce is official, a spouse can file a joint return for the previous year. A person who is eligible to file a joint return may choose to file as married filing separate.
A spouse who cannot file a joint return may save taxes by filing as head of a household, which offers a larger standard deduction. Its larger tax brackets provide a lower tax rate than filing as a single taxpayer.
Using the head of household status after divorce is allowed when three requirements are met. The person is single, divorced or legally separate on the last day of the year, the taxpayer paid over half the costs of keeping up the house for the year and the taxpayer lived with a qualifying dependent, such as a child or other dependent, for more than six months of the year.
For employed spouses, it is also important to update the W-4 so that the employer correctly withholds taxes. Joint filers must divide their W-4 withholding between both spouses, so there may need to be a recalculation or allowance adjustments.
Until next year, spousal support payments are an above-the-line deduction when filing after divorce. Spouses who pay alimony may deduct payments from gross income as they calculate adjusted gross income. These payments are deductible even if a taxpayer claims the standard deduction. Alimony recipients must report payments as income.
A parent may claim a child as a dependent if they are the custodial parent. This provides eligibility for the earned income tax credit and the child and dependent care credit. After the divorce, the parent may be eligible for claiming the head of household status.
The non-custodial parent cannot claim these credits, but may claim the child as a dependent if the custodial parent executes a form 8332. This allows the non-custodial parent to claim the child tax and additional child tax credit.