Divorce signals many changes in an individual’s life. Some of the most noteworthy adjustments relate to one’s living situation, child custody, income and household budget. There are also several other changes that are often overlooked, but can have a significant impact on an individual’s financial standing. For example, for individuals that divorce during 2015, it’s important to understand how a divorce impacts filing and other tax decisions.
If an individual’s divorce decree was finalized on or prior to Dec. 31, 2015, he or she must file as single. This is true even if an individual was still legally married for the majority of the year. In some cases, a change in filing status will serve to be beneficial while in other cases there may be additional tax burdens.
For divorced parents, when preparing tax documents, it’s important to take child custody decisions into consideration. Not only can a parent claim a $4,000 tax exemption per child, but there are also other child and educational tax credits that can quickly total up to thousands of dollars. It’s important to note, however, that only one parent is allowed to claim these deductions and that is the custodial parent. The only way a non-custodial parent can claim child-related tax deductions is if a custodial parent agrees not to take them.
Additional tax-related divorce matters relate to how the Internal Revenue Service views spousal and child support. With regard to spousal support, the paying party is allowed to deduct all payment amounts and the receiving spouse must claim all payments received as income. However, the same rules don’t apply for child support where neither party is required to deduct or claim related payments.
In addition to the issues discussed above, matters related to the division of retirement accounts and the sale of a shared home also have tax implications. Every individual’s situation is unique and it’s wise to consult with a divorce and/or tax professional that can review one’s specific case and provide financial and tax advice.
Source: The Motley Fool, “Here’s How Your Taxes Changed If You Just Got Divorced,” Dan Caplinger, Feb. 11, 2016