Divorce fallout extends to tax pitfalls, including alimony tax reform

February 14, 2018 : Teresa L. Clark

Major life events, including changes in relationships, can have a big impact on how people file their taxes. Filing taxes after divorce falls into this category. Catherine Martin, senior tax research analyst at The Tax Institute at H&R Block offers these tips to help people who are separated or divorced file accurate tax returns.

Alimony is a deduction for the payer and taxable income for the recipient (for now)

For divorce decrees finalized before the end of 2018, 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. Spousal support tax reform has changed this.

“Because of changes in the Tax Cuts and Jobs Act, there will be alimony tax changes; alimony will not be deductible by the payer or taxable to the recipient for divorces finalized after 2018,” said Martin.

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.

Name changes impact timely refund processing

After a name change, taxpayers should request a new Social Security card with their new name. The name on the tax return must match what the Social Security Administration has on file.

“If you file with a different name, it could take longer to process your tax return, result in denied tax credits or deductions and delay the issuance of a tax refund,” said Martin.

Marital status changes can change tax filing status

A taxpayer’s marital status on Dec. 31 is their filing status. This means taxpayers who were not divorced or legally separated on Dec. 31 generally must continue to file as married filing jointly or married filing separately.

Being divorced could qualify a taxpayer to file as head of household if they also meet these two conditions:

  • Paid more than half the cost of keeping up their home
  • Had a qualifying dependent living in their 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.

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 before exemptions are eliminated in tax year 2018. 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. The custodial parent, if eligible, would claim the earned income tax credit, the child care credit and file as head of household.

“The tax reform law also makes changes to the benefits around dependents. While exemptions go away, the child tax credit doubles from $1,000 to $2,000 and has a higher income limit,” said Martin.

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
    • 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)
  • Innocent spouse relief
  • Separation of liability
  • Equitable relief – a 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

“No two tax returns are quite the same, not even for the same taxpayer year to year. Your taxes will change with your life, and not recognizing this leads directly to some of the most common filing mistakes,” said Martin.

When big life changes happen, there are often big tax changes to consider. Taxpayers who want to understand their specific tax situation should consider talking with a tax professional.

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Teresa L. Clark

Teresa L. Clark

Contributor

Teresa L. Clark came to H&R Block in January 2010 after working as a civil servant for more than 13 years. Since that first tax season she has written blog posts and talking points, edited content of all shapes and sizes, facilitated media interviews for the experts in The Tax Institute at H&R Block and supported the DIY team. Clark has a master's degree in integrated marketing communications from the University of Kansas and is a member of the Honor Society of Phi Kappa Phi.

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