Divorce And Taxes: What You Should Know (And Get In Writing)
If you're going through a divorce now, or have just recently divorced, it's not too soon to start thinking about your taxes. Planning early can help you avoid expensive mistakes and a lot of frustration. Here are some things that you need to know.
Your Marital Status On December 31st Controls Your Filing Status
It doesn't matter what your marital status is when you file your taxes - your marital status as of the last day of December controls your filing status on the tax return. If you were still legally married as of that date, regardless of any separation, you can still file a joint return.
Since filing jointly can often provide a bigger tax return, allow you to take important deductions like the child income tax credit, or avoid paying taxes on temporary spousal support you've received, it's often in a couple's best interests to do so.
However, you generally won't get a judge to order your ex-spouse to file that way, and both parties have to agree to file a joint return in order to take advantage of the deductions and other financial benefits. That means that if your divorce is acrimonious, you may not have the option.
Get Several Important Agreements In Writing Before You File
It's not uncommon for tax issues to become bargaining chips for divorcing spouses, due to the financial value that can be gained.
There are several agreements that you need to make sure are in writing. These include:
1.) What filing stats will you use? If you can still file a joint return, and it has an advantage for you, get your spouse to agree to it in writing. That way you have something to rely on when it comes time to get the taxes in, and you don't have to renegotiate, especially if your communications have soured.
2.) Who claims the kids? It's not always easy to tell who has the right to claim the children as dependents, because shared custody agreements may have a child spending nearly even amounts of time with each parent. A common method of settling the matter is to have each spouse claim the kids on alternate years.
It's also possible for a non-custodial parent to claim a child as a dependent, but only if the custodial parent agrees to give up the right to do so. Once, you could use your divorce papers to settle the matter, but now the custodial parent has to sign IRS form 8332, titled "Release/Revocation of Release Of Claim to Exemption For Child By Custodial Parent."
If you can't get the other parent to sign this form, and he or she has primary custody, you cannot claim your child as a dependent, even if it says that you can in your divorce decree. So, get that form signed early as part of your divorce negotiations.
Remember that the right to claim a dependent child also affects your filing status. If you were still married on December 31st, but your spouse/ex-spouse won't agree to filing a joint return, you have to be able to claim a dependent in order to file as "head of household." If not, you have to file "married filing separately."
3.) How are tax liabilities and tax refunds split? If you and your divorcing spouse do agree to file a joint return, you're likely doing it so that one or both of you is able to minimize tax losses or maximize a refund. There's nothing wrong with that if you meet all the requirements.
However, get an agreement in writing about how the tax bill or tax refund is going to be handled. You can split the loss or refund down the middle if you want, or divide it up any way you choose, but you don't want an informal agreement to guide the way. If possible, it never hurts to arrange for a refund check to go to your attorney's office so that someone can oversee the agreed-upon division of funds.
There can be a number of other tax-related issues that arise over the course of your divorce, so don't hesitate to seek financial advice before you agree to a division of property or other financial settlements. Many times a divorce attorney from a firm like http://www.glfamilylaw.com will have information available for you or can advise you. If not, ask him or her for a recommendation to a financial adviser who can walk you through all of the pros and cons.