Each tax filing season can bring up thorny issues that will affect couples long after they’ve separated. Unless ex-spouses can set aside their differences, one or both partners will often end up overpaying.
According to a recent story in the Wall Street Journal, from 2010 – 2015, people paying alimony deducted about $57 billion. People receiving alimony claimed only about $47 billion. That’s a $10 billion difference! That means a lot of former spouses are not working together.
One tax preparer in the Wall Street Journal story told of a recent tax return he did where the wife was entitled to the deductions and tax credits for the children, but it was of no use to her since she had no income. She allowed her ex to take the deductions and credits instead, saving him $2500. If they had not worked together, nobody would have benefited. We never want to see anyone pay too much to Uncle Sam. So we urge you and your spouse to work together if you can save some money by doing so.
If you have a question about anything in this post, you should ask your accountant. This post is designed to help you spot issues and correct misconceptions – not provide detailed tax guidance. We are not tax lawyers. With that said, here are some tax issues you need to be aware of if you are divorced.
Alimony payments are deductible if you are the payer. They are taxable if you are the one who receives them. Payments must be provided for in the divorce or separation agreement. Gifts and voluntary payments, like buying an item for your child, typically cannot be deducted. If the IRS thinks your alimony deductions are voluntary gifts or child support, they can challenge the claim. Alimony can be used to fund an IRA (individual retirement account). Unless the alimony agreement specifies an earlier date, deductions end when the recipient dies.
Child support payments don’t get any favorable tax treatment. They are not deductible by the payer, and they are not taxable to the recipient.
Dependent exemptions are a deduction benefit, at a 2016 rate of $4,050 for each child who qualifies as a dependent. There are a lot of rules regarding who does and does not quality. See IRS Publication 501. Ex-spouses can often exchange this exemption from year to year by filing IRS Form 8332. This can be helpful when one ex is considered a high earner, since the exemption phases out at higher income levels.
Tax credits are more valuable than tax deductions, because they offset tax owed. Tax credits involving children typically go to the spouse claiming the personal exemptions for them. But they phase out at certain income levels. These numbers get complicated, and you should seek a tax preparer’s guidance if you think you can claim them.
There are tax breaks, like the American Opportunity Credit, which can reduce taxes for college expenses. In some cases, it makes sense to let your child claim the benefit instead of you. This is because the credit phases out at higher incomes. Again, ask your tax preparer if this is something you can do.
Usually, you must have full or partial ownership of the home, and actually pay the expenses, to qualify for typical homeowner deductions (like those for mortgage interest or property taxes). When a home is sold and the proceeds divided, as is often called for in a divorce decree, there are more tax exemptions to claim. See IRS Publication 523 and ask your accountant if you are in this situation.
I will say it again – if you have any questions about these issues you really should ask your tax preparer or an accountant. I hope this article has helped you at least spot issues you need to be aware of at tax time. Good luck!