Finances: At Tax Time, Divorced Couples Should Negotiate Child Deductions
Going through a divorce is, well, taxing. It can, and very well might be, leaving you drained emotionally, physically and financially. According to Craig Hyldahl, CDFA, certified divorce financial analyst, principal of R.I.C.H. Planning Group and financial professional with AXA Advisors, countless divorce decisions can have a direct impact on one’s financial well-being. “The combination of life-changing decisions and extreme stress can lead to mistakes that would not be made under ‘normal’ circumstances,” he said. But the IRS doesn’t have to be a third party to your divorce. Follow these tips to save money, reduce stress and guarantee you aren’t hit with hefty tax repercussions.
Tip 1: Report the correct marital status.
You must file your income tax as a single taxpayer if your divorce was concluded by the end of the year. If your divorce is final by December 31st, the IRS still considers you unmarried all year. Report your filing status as single if a judge signed a decree of divorce or separate maintenance. However, you may be able to file as head of household despite a signed decree, which can decrease your income tax obligation. To be eligible for head of household you must have paid over half the cost of keeping up your home for the tax year; Your child must have spent more than half the year at your home your spouse must have lived elsewhere for over six months.
Tip 2: Negotiate for child-related deductions.
A tax advisor can calculate which spouse will benefit the most from including these types of deductions. However, a non-custodial parent can’t claim the child care credit regardless if he can claim the child as a dependent on his tax return. “If you want the credit, you need it in writing every year,” said Adryenn Ashley, author of “Every Single Girl’s Guide To Her Future Husband’s Last Divorce and Spotting The Kooks.” If you take the credit based on a verbal agreement, or even based on your divorce decree, it’s still not legit. Belinda Rachman, Esq., tries to make these written agreements a win/win for both parties. She includes a tax clause in the divorce that reads, ‘It is the parties’ intention to minimize their tax obligation by sharing the child tax deductions as follows. The parties shall each calculate what their tax obligation would be by taking all and none of the children as their tax deductions. The party who would benefit more shall take the deductions. Should the non-custodial parent be the one who benefits more than the custodial parent, they shall pay the custodial parent what they would otherwise have received as a return or the difference they now owe as a tax without the deductions so that each side benefits and the joint tax obligation is minimized.
Tip 3: Deduct your legal fees, if possible.
Legal fees that are directly associated with alimony payments may be tax deductible in certain situations. If legal fees accrue from protecting your income from an alimony claim, they may be able to be deducted.Even attorney fees can be tax deductible if they provided you with tax advice. If the itemized and total miscellaneous deductions exceed two percent of your adjusted gross income, some of the costs of the divorce can be deductible. These include fees for tax planning, fees for obtaining taxable income and fees for securing interest in qualified retirement plans.
Tip 4: Save 10 percent from IRA distributions.
Those of you under 59 and a half years old who receive proceeds from your spouse’s 401K as part of the settlement and use a QUADRO (qualified domestic relations order), can receive a distribution on some or all of the proceeds and have the 10 percent early withdrawal penalty waived, providing you take the requested proceeds before they are deposited into your new IRA. “Once these proceeds are deposited into your IRA, any withdrawals will be subject to the normal 10 percent early withdrawal penalty,” says Hyldahl. This benefit does not apply to IRA to IRA transfers.
Tip 5: Make sure your alimony follows the rules.
Yes, child support is not tax deductible, but you don’t have to deduct child support to commit fraud. Claiming an alimony deduction for “all deductible family support” is also against the law. “This hybrid of child and spousal support has a pretty hefty penalty for triggering the recapture rules and if your divorce decree is written with the best interest of the child support agency in mind, then you’re ripe for a visit from the IRS,” noted Ashley. She suggests your alimony meet the following criteria: If the support is more than $10,000 per year, it has to be ordered for more than six years. All deductible family support will trigger recapture if the support amount is changed six months before or after any happening of a child (married, graduated, moved out, joined the military, etc) “ make that one year if there is more than one child. If you got the house in the settlement, the “basis” for which capital gains is calculated is on the original value. “If you bought your ex out of the house, too bad, you don’t get any credit for that,” Ashley states. But do get $250K capital gains exclusion if you lived in the house for two of the last five years.
FOR MORE INFORMATION?
There are many publications available from the IRS free of charge that contain a wealth of information, including:
Publication 503: Child and Dependent Care Expenses
Publication 504: Divorced or Separated Individuals
Publication 523: Selling Your Home
Publication 554: Tax Information for Older Americans
Publication 555: Federal Tax Information on Community Property
ALIMONY RECAPTURE WORKSHEET
Step 1: Calculate Recapture for Year 2
1. Alimony paid in year 2 $______
2. Alimony paid in year 3 $______ plus $15,000 ______
3. Subtract line 2 from line 1 (not less than zero)______
Step 2: Calculate Recapture Base for Year 1
4. Alimony paid in year 2 ______
5. Amount from line 3 above (year 2 recapture) ______
6. Subtract line 5 from line 4 (not less than zero)______
7. Alimony paid in year 3 ______
8. Add lines 6 and 7 ______
9. Divide line 8 by 2 ______
10. Floor for recapture 15,000
11. Add line 9 to line 10 ______
Step 3: Calculate Recapture for Year 1
12. Alimony paid in year 1 ______
13. Amount from line 11 above ______
14. Subtract line 13 from line 12 (not less than zero) ______
Step 4: Calculate Total Recapture?15. Amount from line 3 ______
16. Amount from line 14 ______
17. Add line 15 to line 16 ______
Line 17 is the total recapture amount
