Couples considering a divorce have a lot of decisions to make. Some of those decisions impact filing income tax returns during separation and after the divorce is final. Getting advice from a qualified tax professional helps couples and their attorneys understand the tax impact of their options and decisions.
Four important tax-related considerations in a divorce proceeding are:
- Child Custody
Decisions about primary child custody are significant. Custody drives which parent can take many child-related deductions and credits, the earned income tax credit, and the head-of-household filing status. Non-custodial parents have additional tax filing requirements.
- Child Support and Alimony
Legal documents must clearly state whether payments between divorcing parties constitute alimony or child support. Alimony is generally taxable for the recipient and deductible for the payer. Child support is neither taxable nor deductible.
- Filing Status and Timing
Filing status is defined by the IRS based on an individual’s legal status on the last day of the tax year. Couples whose divorces are not final by December 31 are considered married for the entire year. Talking to a tax professional about filing options can help avoid expensive mistakes, especially in community property states.
- Selling the Home
A married couple may be eligible to exclude up to $500,000 in home sale profit. A single taxpayer gets only one-half that amount. If neither spouse plans to keep the home, and it has greatly appreciated in value, it could make sense to sell before the divorce is final.
Divorce and taxes are both stressful topics on their own. Together, they are particularly fraught. Being armed with information reduces tension and helps both parties move forward without tax worries.