Warmer weather, greening grass and advertisements for tax services all indicate that spring, and the April tax filing deadline, is just around the corner. For Massachusetts residents who are currently going through or were divorced during 2015, it’s important to understand how divorce impacts taxes.
Individuals who are separated or were recently divorced are likely to have questions about whether to file as single or jointly with a soon-to-be ex or ex-spouse. The answer depends on whether or when a divorce decree was finalized. Individuals who were still legally married as of Dec. 31, 2015 have the option of filing a joint return whereas those who were legally divorced by this date must file separately.
While married, parents likely took full advantage of the many child-related tax credits and exemptions. However, once divorced, only the parent who is legally listed as the custodial parent is allowed to claim a child as a dependent and also benefit from the related tax deductions and credits. In cases where a child custody order doesn’t explicitly state which parent is the custodial parent, such a designation is reserved for the parent with whom a child spends the majority of time.
In divorce cases involving alimony, both parties must take action come tax time. Provided that alimony payments are included in a divorce agreement, the Internal Revenue Service allows the paying party to deduct these payments from his or her total gross income. Additionally, the IRS requires that the party receiving alimony payments claim such payments as income on a tax return.
While the IRS acknowledges payments related to alimony, the agency does not allow payments for child support to either be deducted by the paying party or claimed by the receiving party.
Other divorce-related actions that may impact one’s taxes include asset transfers, the sale of a shared or vacation home and the transfer of retirement assets. When negotiating a divorce settlement, a divorce attorney can answer questions and provide information about the possible tax implications associated with certain decisions or concessions.
Source: Turbo Tax, “Getting Divorced,” March 16, 2016