Divorce & Taxes

If you’re getting divorced, you have many issues to contend with, not only emotionally and relationally, but logistically and financially as well. Although much of the anguish from divorce is inescapable, some of the financial pain from this process can be alleviated with proper planning and cooperation between former spouses.

The traditional rules pertaining to divorce mandate that the custodial parent who houses a dependent child for more than half the year can claim the child as a dependent on his or her tax return. If neither parent has custody of the child for more than half the year, then neither parent can claim the exemption. Then there is the support test, which determines who actually provided for the dependent child’s support for more than half the year. A key point to remember here is that when one ex-spouse remarries, then the joint income that he or she shares with the new spouse will count in the support test calculation. Of course, all of these conditions are subject to proper legal proceedings and court orders. If proper legal procedures are not followed, then IRS regulations become irrelevant and many legitimate tax deductions and credits can be lost. One key condition that must be met is that ex-spouses cannot have lived together in any capacity during the last 6 months of the year for which they are filing tax returns. If they did not divorce until less than 6 months before the end of the year, then they cannot have cohabitated during the remainder of the year. Finally, the child must be in the actual custody of the custoidal parent for at least 6 months of the year in which the parent claims the child. This does allow for time away due to vacations, summer camps, short visits with relatives, and so forth, but it does not allow for extended stays with other relatives or guardians who end up providing more than half of the child’s support for the year.

There are some situations where the spouse who is eligible to claim a dependent may not necessarily benefit from doing so. For example, the custodial spouse may not have sufficient income to benefit from the dependency deduction(s) and/or credit(s). In these cases, the custodial parent can sign form 8332 with the IRS and waive the right to the exemption, thus allowing the other parent to claim the child on his or her tax return.

Obviously, the spouse with the highest adjusted gross income will benefit the most from the dependency exemption. Taxpayers with high incomes may need to negotiate this issue with their ex-spouses, as an ex-husband who makes $80,000 a year will obviously reap a substantially higher benefit from claiming a child than an ex-wife making $28,000 a year. If there are multiple children or dependents involved in a case like this, then the income tax preparers for both spouses may need to experiment a bit with possible dependent scenarios for both spouses in order to determine what arrangement will provide the maximum benefit for all concerned. In cases where the ex-spouses have joint custody of a child and the child has lived with each parent for half of the year, then the parent with the highest adjusted gross income will receive the dependency exemption by default.

Generally, the parent that can claim the dependency exemptions will also receive the corresponding tax credits, such as the child tax credit, dependent care credit and earned income credit for those with dependents. In most cases, only a divorce decree can specify otherwise. Of course, the tax credits for dependents can be much more valuable than the exemptions claimed, as credits are prorated dollar-for-dollar against actual taxes due for taxpayers, whereas deductions simply reduce the amount of taxable income. But regardless of who gets to claim the exemption or the credits, any parent that pays his or her child’s medical bills can deduct them on Schedule A of his or her tax return, as long as he or she is eligible to itemize deductions.

In many cases, only one spouse will benefit from claiming a child, regardless of all other factors. This spouse may be willing to make other concessions in order to realize this tax advantage. In any case, both spouses involved in any divorce can only help themselves by knowing the rules.