Divorce fallout extends to tax pitfalls
Major life events, including changes in relationships, can have a big impact on how people file their taxes. Divorce falls into this category. H&R Block (NYSE: HRB) offers these tips to help people who are separated or divorced file accurate tax returns.
The IRS needs to know about name changes – they impact timely refund processing
After a name change, remember to request a new Social Security card with your new name. Your name on your tax return must match what the Social Security Administration has on file. If it doesn’t, it could take longer to process your tax return, result in denied tax credits or deductions and delay the issuance of a tax refund.
Marital status changes can change tax filing status
Your marital status Dec. 31 of the year you are filing your tax return is a determinant in your filing status. This means taxpayers who were not divorced or legally separated Dec. 31 generally must continue to file as married filing jointly or married filing separately.
Being divorced could qualify you to file as head of household if you also meet these two conditions:
• Paid more than half the cost of keeping up your home
• Had a qualifying dependent living in your home more than half of the year.
Divorced taxpayers who do not qualify to use the head of household status will generally file as single.
Alimony is a deduction for the payer and taxable income for the recipient
The payer may claim alimony payments as an above-the-line tax deduction, which means it can be deducted by taxpayers who don’t itemize and still reduce taxable income. The recipient must claim alimony as taxable income. Adjusting the amount of withholding on their W-4 can help some recipients avoid needing to make quarterly estimated tax payments.
Child support is a different story; child support isn’t tax-deductible for the payer, and child support isn’t considered income for the recipient and therefore should not be reported on income tax returns.
Who claims children as dependents is up to the parents
In most cases, the custodial parent (the parent the children spend more nights with) will claim the children as their dependents. However, noncustodial parents can claim children as their dependents with the proper written consent of the custodial parent.
If the custodial parent releases the exemption, the noncustodial parent would also claim the Child Tax Credit for children under 17 and the Child Care Credit. The custodial parent, if eligible, would claim the Earned Income Tax Credit, and file as head of household.
Injured/innocent spouse protection can provide relief
Divorce, separation, and remarriage can often prompt people to review their tax history and sometimes seek relief. These are the types of protection the IRS provides for eligible spouses:
• If the couple is filing jointly and one spouse owes back taxes or has other past-due obligations (e.g., child support) for which the IRS can hold back some or all of a joint tax refund, the other spouse can request injured spouse relief
o When injured spouse relief is granted, the injured spouse may be able to get their portion of a tax refund, while their spouse’s portion would offset the past-due debts
• Taxpayers who suspect a past joint tax return may have understated income and tax without their knowledge may seek relief from joint tax liability by requesting innocent spouse relief, which is available in these three categories (each with its own set of qualifications)
o Innocent spouse relief
o Separation of liability
o Equitable relief – a recent change has removed the two-year time limit for requesting this specific type of relief, which the IRS says is often sought by people who faced difficult or intimidating situations, such as domestic abuse.
Taxes fluctuate due to three areas – income, filing status and possible tax credits and deductions. Not understanding this leads directly to taxpayers making some of the most common filing inaccuracies and not taking tax breaks they are eligible to claim. When big life changes happen, there are often big tax changes to consider. To make sure you understand your tax situation and are able to make sound financial decisions, consider talking with a tax professional.