With April 15th just around the corner, many divorcing and recently-divorced people wonder how the divorce affects their income taxes. After all, taxes are highly dependent on a persons family structure, and divorce is a major change to that structure. Although there may be a variety of subtle impacts divorce can have on taxes, three are particularly common. First, divorce will affect the filing status of both spouses. Second, divorces involving custody disputes will affect the dependency exemptions that filers can claim for raising children. Third, some property transfers during the property division process may have tax implications.
The most direct way that a divorce will affect a persons income taxes is through their filing status. A persons tax status depends on whether they are filing as married, single, or head of household. These filing statuses affect which tax bracket people end up in and the size of certain exemptions they can claim. Generally speaking, the choice following a divorce is whether to file as a single individual or as a head of household. The head of household status is available to unmarried people who have a dependent to take care of. It is generally treated better than single status for tax purposes, though every persons tax situation is unique and requires individual analysis.
Another way that divorce can affect a persons income taxes is through the dependency exemption. These exemptions are tax breaks that people get to claim for raising children. After a divorce, people may no longer be eligible to claim it. The general IRS rule is that the dependency exemption goes to the custodial parent, and that in cases of joint custody it goes to the parent who has the child for more of the time, unless there is a multiple support agreement in place. However, the IRS allows parents to decide between themselves who gets to claim the credit as part of the divorce settlement. Consequently, a couples divorce decree may end up overriding the IRS rule.
Property transfers as a result of a divorce may also have important tax implications. The general rule is that property transfers “incident to a divorce” are ignored for income tax purposes. However, there are some exceptions. For instance, the divorce may involve the transfer of appreciated assets, such as stocks or real estate. While the receiving spouse likely does not have to pay taxes on that transfer from the divorce, the later sale of those assets will likely have important tax implications.
Filing for divorce is an important decision that affects many different facets of a persons life. If you are considering seeking a divorce and want to learn more about the process, contact an experienced Naperville family law attorney today for more information.