Tax Implications of Filing for Divorce

Getting a divorce will most likely have your head spinning in a lot of different directions. While this is likely one of the most stressful events you will face, it is imperative that you consider all of the implications and possible complications caused by the process. One of the most important is income tax liability.

There are several important points to consider in order to avoid increased tax liability, an IRS audit, tax penalties, or other serious consequences:

Filing Jointly: Most married couples file jointly on their tax returns. However, once you are getting separated or divorced, it is typically not a good idea to keep doing so. If you have been separated for more than six months, then one parent can file as “Head of Household,” but it is typically safer to file separately and change to joint should the circumstances change after the fact (you cannot go the opposite route and amend a joint return once it is filed).

Child Tax Deduction: Federal law is absolutely clear that the custodial parent is the parent entitled to the tax deduction for the children. Further, judges in the state of Georgia are not permitted to award a tax deduction to the non-custodial parent. In some cases, it may make sense for the custodial parent to “give up” these rights and allow the non-custodial parent to obtain the tax deductions. However, extreme caution should be used with this type of provision as it is often times non-modifiable and may cost the custodial parent several thousand dollars per year in lost tax benefits.

Spousal Support/Alimony: Spousal support is generally tax deductible for the payor and counts as added income for the payee. In contrast, child support is never considered taxable income and does not count as a deduction for the parent paying it.

Tax Implications for the Year of Divorce: Even if your divorce was finalized between Jan. 1 and April 18 this year, you are still officially married when it comes to filing your taxes for last year. If your Final Judgment and Decree was signed before January 1, you cannot file as married even if you were for most of the previous year. However, if you qualify, the option of filing as “Head of Household” could save you money.