January 31, 2014 marks the opening of the IRS filing season. The IRS has delayed the opening of tax season due to “critical system testing” following the October government shutdown. But it is not too soon to prepare your taxes (or start thinking about it) if you have received your tax documents. W-2′s are due to employees by January 31st, as well.
There are important and substantial tax considerations resulting from entering a divorce judgment, legal separation, and/or custody judgment. We are not tax specialists or experts in the area of taxation and we always recommend seeking out the advice of a Certified Public Accountant. But here is a list of things to think about.
Married – your marital status on the last day of the year determines your marital status for the entire year. If you were divorced on December 31, 2013, you cannot file as “married” for your 2013 taxes. Sometimes couples parting ways delay the final divorce date in order to get one last year of tax benefits from filing married.
- Married Filing Jointly – if the divorce is still pending, you are still legally married and you must file either married filing jointly or married filing separately. There is the potential that filing jointly will have more benefits but you will be responsible for your spouse’s information on the form.
- Married Filing Separately – if you don’t trust your spouse, you may want to file separately but it can limit potential tax benefits.
Single – if you are unmarried, legally separated or your divorce is finalized, you can file as single.
Head of Household – if you are unmarried and paid more than half the cost of maintaining a home for you and a qualifying person.
The parent with primary custody is assumed by the IRS as the parent that will claim the dependent exemption for the tax returns. However, this is not a requirement. Parents can agree to divide up the exemptions (ex. if there are 2 children, each parent claims one child). And sometimes the court will order that the parents alternate years if the non-custodial parent contributes substantially to the support of the child(ren).
Medical expenses can be deducted if you paid for them, regardless of whether you can claim the child(ren) as a dependent.
- Child support payments are not deductible to the parent paying them (payor);
- Maintenance (formerly known as alimony) is an above the line deduction for the payor;
- Maintenance is considered taxable earned income to the person receiving it (payee).
- Unallocated support does not differentiate between child support and maintenance and is taxed like maintenance. This can be helpful for the high income payor and the low income payee. Unallocated support can be tricky and if you make a mistake in how you receive/end unallocated support, you could end up losing money.
Exchanging Tax Documents with your Ex Each Year
Sometimes the divorce or custody judgment will require the parties to periodically turnover tax documents. This allows the custodial parent (usually also the payee) to determine whether the income of the non-custodial parent (usually the payor) has gone up and whether to ask the court to modify child support.
Transfer of Property
Transferring stocks, IRA and 401(k) funds are actions that are not taxable in a divorce transfer. Cashing them out, on the other hand, is a different story.
Under the IRS code, transfers of real property between spouses incident to divorce are tax free transactions. However, real property transfers can create taxable situations in some cities, like Chicago . Since 2005, the has imposed a tax upon the privilege of transferring title to, or beneficial interest in, real property located in the corporate limits of the City of Chicago and this applied to divorcing couples.