Tag Archives: tax credits

Divorce and Your Tax Liabilities

tax, Wheaton divorce attorneyDivorce causes changes in multiple areas of a person’s life, but one that is often overlooked is a spouse’s tax bill. Regardless of the time of year when you divorce, your next tax return is likely going to be affected by such a profound life change. You will likely lose certain exemptions and deductions, but you may also gain some. The important thing is to ensure an active role in how your divorce decree is written, so you can have as much control as possible over the tax consequences for both you and your ex-spouse.

Alimony and Child Support

Perhaps the most unpleasant surprise for so many is the tax consequences of alimony and child support. While the parent with the majority of the parenting time will be granted child support in all but the most unusual Illinois divorce cases—child support is a duty owed to the child or children, not to the ex-spouse—alimony or spousal support is a different matter. To determine whether such payments are warranted, the court will consider a host of factors, such as the income of both parties, the amount of support given during the marriage if one spouse had to leave the workforce for some reason—including giving birth or obtaining an advanced degree—and the actual current needs of each spouse.

The potential issue is simple: periodic maintenance, which is spousal support paid in increments over time, is taxable as income for the recipient and tax deductible for the payor. Child support is not taxable as income for the recipient and not deductible for the payor. As such, a significant maintenance award can cause serious tax consequences for a parent. One of the listed factors that a court will consider in awarding maintenance is the tax consequences, but not every court will actually consider them, or the court may consider the other factors to hold more weight than the alleged tax burden would be.

Child-Related Deductions and Credits

The other major concern for many divorcing couples is who gets to claim the exemption for any children of the marriage. Depending on your income, claiming the exemption may save you as much as $1,000 per minor child, and as such, it can be a very big help for divorced parents in lower tax brackets. Since 1997, being able to claim the exemption also means the ability to claim the child tax credit, as well as “scholarships” if you are paying tuition for one or more college-age children.

The exemption may be traded to the other parent if it would benefit them more. The exemption is valuable to those with incomes on the lower side, generally, as incomes over about $100,000 will price themselves out of any benefit, but other credits like the child care credit must remain with the custodial parent. Some parents misunderstand the value of the exemptions, or try to fight for them out of some kind of misplaced pride, but the best policy is generally to negotiate something in return for such exemptions if you would receive no benefit from using them.

Need Help Understanding Potential Tax Consequences?

Divorce is difficult enough without having to potentially make significant changes to your financial siutation. If you need assistance navigating the potential pitfalls, our experienced DuPage County divorce attorneys can help. Contact our offices today to set up an initial consultation.

 

Sources:

http://www.ilga.gov/legislation/ilcs/documents/075000050K504.htm

https://www.irs.gov/uac/ten-facts-about-the-child-tax-credit

Tax Status and Divorce

dependent exemptions, divorce, divorce and marital status, tax status, tax deductions, tax brackets, tax credits, dependent deductions, married filing jointly, married filing separatelyFiling taxes can be a complicated endeavor at the best of times, and doing it during a divorce only serves to make it more difficult. This is because many parts of a person’s taxes depend on marital status and family relationships. Those sorts of relationships can affect things like tax brackets, deductions, and tax credits.

Two of the largest issues that a divorce presents in regards to taxes are marital status and dependent deductions. Marital status, which includes categories like single, married, or head of household, alters a person’s tax bracket and it can raise or lower their standard deduction. Dependents, which refers to people relying on the tax filer for care, allow the filer to claim them for the purposes of tax deductions.

How Divorce Affects Marital Status

The most obvious way that divorce impacts a person’s income tax filing is via their marital status, which has an effect on the tax rates applied to specific income levels, as well as on the standard deduction allowed by the filer. There are four basic filing statuses that most people will claim: single, head of household, married filing jointly, and married filing separately. Most of these are self-explanatory.

A single status means that the person is unmarried. Married filing jointly means the spouses are filing a single return. Married filing separately means the spouses are each filing their own return. The unusual one is head of household. The head of household status denotes a person, usually single, who is caring for a dependent. The head of household status receives preferential tax treatment in comparison with the single status.

Obviously, going through a divorce will alter the marital status categories available to someone. A single person cannot file as married and vice versa. This leaves open the question of how to handle the tax year in which the divorce occurred, if the spouses were married for part of it and single for the rest. For tax purposes, the IRS declares that marital status is judged as of the last day of the year, so in the example the couple would be counted as single.

How Divorce Affects Dependent Exemptions

Another area in which divorce can affect taxes is in dependent exemptions. These exemptions relate to the number of qualifying people relying on the filer for support. The most common example of a dependent is a minor child that the filer supports. For most people, that dependent exemption will not change in divorce. However, divorces involving blended families present a unique issue, since stepchildren also qualify as dependents. The U.S. Tax Court only recently ruled on this issue, holding that stepchildren remain stepchildren after the divorce, qualifying them as dependents for exemption purposes.

Filing for divorce is an important decision that can have a significant impact on many different areas of your life. Whether you have already made the decision to file or you simply want more information, contact a DuPage County divorce attorney today. Our firm can help you find the right type of divorce strategy for your specific situation.