Tax Consequences of a Divorce

Most couples are well educated on the tax consequences of filing jointly when they first get married. In fact, they welcome their new status with open arms. Getting married generally means the couple will enjoy greater tax deductions, especially if the couple decides to buy a home or have children. However, very few couples consider the tax consequences of a divorce. Divorce is already an incredibly emotional and difficult process to go through and many couples are unprepared for the realities of returning to the “single” status of tax filings. There are several important questions to consider when filing taxes post-divorce.

Which Parent Should Claim the Children?

The amount of the tax deduction can vary greatly, depending on which parent claims the child on their taxes. Before 2009, a couple could designate which parent was allowed to claim the dependency exemption as part of the terms of their divorce decree. After 2009, the IRS began requiring the parties to fill out an IRS Form 8332 to prove dependency. The non-custodial parent has to sign this form for the dependency to be considered valid for tax purposes.

The parent who is claiming the dependents on their taxes can deduct $3,900 per child on their federal income tax forms. Thus if a parent is claiming several children on their forms, there may be a sizeable reduction in taxes owed as a result.

In order for the parent to prove their child’s dependency, two criteria must be met: 1) the child must live with the parent more than half of a calendar year; and 2) the child must be younger than 19 at the end of the year. A parent can also claim this deduction if their child is a full-time student and under the age of 24 during the year. As a compromise, some parents go back-and-forth each year on who gets to claim dependency for the child on their tax forms.

What is Your Own Filing Status?

Your marital status at the end of the year is what determines how you file your tax return.

According to the IRS Publication 504, you are considered unmarried on the last day of the tax year if you meet all the following tests:

  1. You file a separate return;
  2. You paid more than half the cost of keeping up your home for the tax year;
  3. Your spouse did not live in your home during the last six months of the tax year;
  4. Your home was the main home of your child for more than half the year; and
  5. You can claim an exemption for the child.

How are Alimony and Child Support Payments Treated?

Alimony is taxable to the recipient. The ex-spouse who is paying the alimony can deduct it on their taxes. Child support is not taxable to the recipient. The ex-spouse who is paying child support cannot deduct it on their taxes.

What Happens to the Marital Home?

If the couple decides to sell the marital home after they divorce, it will severely affect their taxes. Married couples can realize up to a $500,000 gain on their principal residence. If you are filing as a single person, however, it is reduced to half that amount.

If one of the ex-spouses decides to keep the home, they may be able to apply the mortgage interest deduction to get a tax credit.

Resources in Illinois

If you have any questions about any family law issues, including divorce, do not hesitate to contact one of our experienced Illinois family law attorneys at Sullivan, Taylor & Gumina today.