When you are divorced or separated, the change generates some tax consequences that are important to take into account when preparing to file your annual federal income tax return.
Filing Status
Married taxpayers who file a joint return have a preferential federal income tax rate. The year you are divorced or separated, you filing status changes, unless you remarry before the end of the year. Your filing status as married for tax purposes depends on your status at the end of the year. Even though you were married during the year, if you are not married on the last day of the year, you cannot take advantage of the filing status of married filing jointly.
State law is what determines whether you are legally married on the last day of the year for federal income tax purposes. You are considered single for the whole year if on the last day of the year you are legally separated from your spouse under a decree of divorce or separate maintenance.
The fact that you are separated, in the sense that you and your spouse no longer live together, does not necessarily mean you are not married for tax purposes. When you are married and live apart, but are not legally separated by a decree of divorce or separate maintenance, you are considered married for tax purposes. Also, for purposes of filing a joint return, you will still be considered married if you are separated under an interlocutory divorce decree.
You will also be considered married if you live together in a common-law marriage recognized in the state where you live, or in the state where the common-law marriage began.
Head of Household
If you are divorced or legally separated during the year and are therefore considered single for tax purposes, you may be able to file as head of household. This filing status has a more favorable tax rate than the single status. Also, when you use this filing status, you can take a greater amount as a standard deduction.
You qualify to file as head of household if you meet the following requirements: you are not married at the end of the year; you pay more than half the cost of maintaining a home during the year; and you have a “qualifying person” who lived with you in your home for more than half the year. There is an exception to the requirement that the person has to live with you in the case of your mother or father who is your dependent but did not live with you.
One of the ex-spouses can qualify to file as head of household even when the other can claim an exemption for a child as a dependent, provided the requirements for filing as head of household are met.
When your spouse is a nonresident alien, you are considered single for tax purposes in the U.S. and could qualify for the head of household filing status, unless you elect to treat your spouse as a resident alien for tax purposes. If you make that election, you would be considered married.
When your spouse is a nonresident alien, he or she cannot be a “qualifying person” and you would need to have another person that qualifies, such as your child, in order to be able to file as head of household.
Who Pays More than Half the Cost of Maintaining a Home
For purposes of determining whether you paid more than half the costs of maintaining a home, there are certain expenses that are included and others that are not.
Some of the expenses that are included are rent, mortgage interest, property taxes, insurance on the home, utilities, repairs, and food eaten in the home.
Expenses that are not included are clothing, education, medical attention, vacations, transportation, and life insurance.
In determining the amount of support paid for a child, all the support payments paid by the non-custodial parent are considered to be used for supporting the child. So, when the child lives with one of the parents, but the other parent paid more than half the maintenance cost, the parent with custody could not claim the head of household filing status because the requirement of having paid more than half the cost of maintaining a home has not been met.
Qualifying Person
In general, a “qualifying person” is a relative for whom you can claim an exemption as a dependent and who lived with you for more than half the year. As previously mentioned, your mother or father can live in another home and still be a qualifying person if you can claim an exemption for him or her as a dependent and you paid more than half the cost of maintaining a home that was the principal home of your mother or father for the whole year. This could be the case if your parent lives in his or her own home, or in a nursing home.
In determining whether the person lived with you more than half the year, temporary absences from your home are included in the time that person lived with you. The same applies when you are absent from your home temporarily. These temporary absences include periods during which you or your qualifying person is away from home due to illness, education, business, vacation, and military service.
Dependents
When you are divorced or separated, you will have to determine whether you or your ex-spouse can claim the exemption for dependents who you may have previously claimed together on a joint return when you were married.
Children
Normally, the custodial parent can claim the exemption for a child as a dependent. But there are cases in which the non-custodial parent could be entitled to claim the exemption. For this to be the case, the following conditions would have to be met:
As the parents, you are legally divorced or separated according to a decree of divorce or separate maintenance, are separated according to a written separation agreement, or lived apart all the time for the last six months of the year.
As the parents, together you provided over half the child’s total support for the year; that is, not more than half the child’s support was provided by someone else, or paid with the child’s own resources.
One or both parents had custody of the child for over half the year. The custodial parent would sign a statement indicating that he or she will not claim an exemption for the child and the other, non-custodial parent must attach this statement to his or her annual federal income tax return. IRS Form 8332, “Release of Claim to Exemption for Child of Divorced or Separated Parents”, can be used for this purpose, or you can use a similar statement that contains the same information. Form 8332 can be downloaded from the IRS website at www.irs.gov.
In this case, the non-custodial parent can claim an exemption for the child as a dependent and can claim the child tax credit, but cannot claim the child as a qualifying child for purposes of filing as head of household. Also, the non-custodial parent in this case could not claim the child and dependent care credit, the exclusion of benefits for dependent care, or the earned income credit.
Other Dependents
If you and your ex-spouse have other dependents, you will have to see who contributed more for their maintenance in order to determine who can claim the exemption, provided the person continues to be a “qualifying person” for either one of you, or both of you.
To be a qualifying person, that person must not be a “qualifying child” of someone else, the person must be related to you, the person’s gross income must not exceed the amount corresponding to one exemption ($3,400 for 2007), and you must have contributed over half the person’s support for the year.
There are cases in which no one pays more than half the cost of the person’s support, and two or more people would be able to claim an exemption for the person as their dependent were it not for the support requirement. In this case, you can reach an agreement with the other persons as to who will claim the exemption, provided that the person who claims the exemption has contributed at least 10% of the costs of support.
The other persons must sign a statement indicating that they will not claim the exemption that year. The person who claims the exemption should keep these statements on file, and must also have a multiple support agreement which must be attached to the income tax return. IRS Form 2120, “Multiple Support Declaration” can be used for this purpose, and is also available on the IRS website.
Alimony constitutes taxable income for the receiving spouse. It is reported on line 11 of Form 1040. When you receive alimony you cannot use Form 1040A or 1040-EZ.
The spouse who pays alimony can claim a deduction on line 31a of Form 1040.
Alimony payments are not taken into account in calculating the amount contributed to the support of children or other dependents.
Child support payments do not constitute taxable income for the receiving spouse and are not deductible by the paying spouse.
Child support payments are taken into account in determining who paid over half the costs of maintaining a child, which can determine who can claim an exemption for a child as a dependent and whether one of the ex-spouses can file as head of household.
In the Future
When you are divorced or separated, you should also consider how the change will affect your tax liability in the future. If you work for an employer, it may be necessary to review your W-4 and make any necessary modification, such as changing your marital status from married to single. If there are changes in the number of exemptions for dependents you can claim after the divorce or separation, you may also need to make this change on your W-4.
If you receive alimony, you may need to make estimated tax payments, or indicate on your W-4 that you would like an additional amount of tax withheld from your pay, since alimony is taxable.
If you are self-employed or have your own business, you may have to change the amount of your estimated tax payments during the year due to the changes caused by the divorce or separation. It would be advisable to do a new estimate of your tax liability, taking into account the change in your marital status and the difference in the tax rate, and the possible change in the number of exemptions for dependents you can claim, in order to determine whether you need to increase the amount of your estimated payments.
Reference:
All Business – Income tax issues facing divorced or separated individuals: www.allbusiness.com
