When most couples file for divorce, their reasons are often emotional and personal, not necessarily financial. However, there are important tax implications of divorce that should never be ignored.
Change in Filing Status
One of the most drastic implications divorce has on taxes is the change in filing status for spouses. Most likely both individuals will see a rise in their tax bill after their divorce is final.
All tax filers must file as single, head of household or married. Most married couples, however, typically file jointly as married. This is because filing together lowers their combined tax obligation.
However, once couples obtain a divorce decree and are legally separated, they must now each file as single or head of household. This is particularly important because if a decree was issued on December 31, 2012, they must still file as single (or head of household) despite being married for the previous 364 days of the year. This filing change will likely increase their tax obligation.
However, if a couple files for divorce in 2012, for instance, but aren’t issued a divorce decree until early 2013, they can still file as married filing jointly.
The Mortgage Interest Deduction
Property distribution in a divorce also carries with it tax consequences. If the family home is awarded to one spouse, for instance, the other spouse loses the ability to claim the mortgage interest deduction on his or her taxes going forward.
Depending on the amount of mortgage taken out for the home, this could be substantial. An individual can deduct up to $1 million on mortgage interest on his or her taxes.
Tax Implications of Alimony
In many cases, alimony will also play a part come tax time. If an individual is required to pay alimony post divorce, that income is deductible and thus lowers the tax obligation.
However, the person receiving alimony will now have to report the income-which will probably increase his or her taxes.
Tax Implications of Child Support
Many couples have children, and it’s common for one to pay child support to the other upon a divorce. However, child support payments are neither reportable nor deductible.
So, an individual who receives child support does not have to report the income and have his or her tax responsibility rise. Alternately, the individual paying doesn’t get to deduct the amount paid and decrease his or her taxable income.
The Tax Exemption for Dependent Children
Another tax implication divorcing couples should keep in mind is the exemption for dependent children.
Married couples filing jointly typically claim the exemption for each qualified dependent child. In the event of a divorce, however, traditionally only the custodial parent will claim this exemption. This means one party will lose out and have a higher tax obligation. (Both parties can, however, claim the exemption but only if the non-custodial parent files a Form 8332. Although, acrimony between spouses may make sharing the exemption impossible.)
Speaking With a Divorce Attorney
While getting divorced may be in the best interests of a couple, the decision has serious tax implications for both parties. To further understand how your divorce may impact your tax returns, please contact an experienced family law attorney.