Divorce and Taxes: Who Claims the Child, Which Filing Status to Use, and What the IRS Allows

If you’re getting divorced, taxes may be the last thing on your mind. Nonetheless, a life event such as separation or divorce has many tax implications.

It is the year when your divorce decree becomes final that you lose the joint return option. In other words, your marital status as of December 31 of each year controls your filing status for that entire year. Couples who are splitting up, but not yet divorced before the end of the year, have the option of filing a joint return. The alternative is to file as married filing separately. If you cannot file a joint return for the year because you are divorced by year’s end, you can file as a head of household.

Only one taxpayer may generally claim any one person as a dependent on a tax return (except in the case of a married couple filing a joint return). You can continue to claim your child as a dependent on your tax return if he or she lived with you for a longer period during the year than with your former spouse. In this case, you’re called the “custodial parent”. The non-custodial parent can claim the exemption for a dependent child if the custodial parent signs a waiver pledging that he or she won’t claim the child.

Sometimes, a parent will claim the dependency tax exemption when they are not entitled to it. If your former spouse files his/her tax return before you do, it is possible that he/she would be allowed the exemption, at least temporarily. Once the IRS looks at your return and detects a duplicate Social Security number (your child’s) being claimed by another taxpayer, the situation changes. If you file your tax return and someone else has already claimed your dependent, then the IRS will apply “tie-breaker rules”.

The IRS tie-breaker rules are applied in the following order:

Relationship Test: If only one of the taxpayers claiming the child is the child’s parent, then the child will be the qualifying child of the parent.

Residence Test: If both parents claim the child but do not file jointly, then the child will be considered the qualifying child of the parent with whom the child lived for the longer part of the year.

Income Test: If the child lived with both parents for an equal amount of time, then the child will be the qualifying child of the parent with the higher adjusted gross income.

No Parent Can Claim: If no parent qualifies to claim the child, the child will be the qualifying child of the person claiming the child who has the highest adjusted gross income.

No Parent Chooses to Claim: If either parent qualifies to claim the child, but they choose not to, the child will be the qualifying child of the claiming person with the highest adjusted gross income, but only if their adjusted gross income is higher than that of either parent (if the parents are married and filing jointly, use one half of their combined adjusted gross income).

Special Rule for Unmarried Parents: If the parents are not married but have lived together with their child all year and the child meets all qualifying tests for both parents, then the parents may decide which parent will claim the child as a dependent.

Understanding the Tax Differences Between Head of Household and Married Filing Separately

Many divorced or separated individuals struggle to decide whether to file as Head of Household (HOH) or Married Filing Separately (MFS). These filing statuses have different tax consequences and eligibility requirements.

The head of the Household typically provides a larger standard deduction and more favorable tax brackets. However, you must meet certain conditions:

• You must be unmarried or considered unmarried on the last day of the year.
• You must have paid more than half of the annual cost of maintaining your home.
• A qualifying child or dependent must have lived with you for more than half the year.

On the other hand, Married Filing Separately often results in higher taxes, and many credits become limited or unavailable. For instance, if you file MFS, you may be ineligible for:

• Child and Dependent Care Credit
• Education Credits (AOTC and LLC)
• Earned Income Tax Credit (EITC)

If you are eligible for Head of Household, it is generally the more financially advantageous option. Consulting with a tax advisor or legal professional can help determine which filing status makes the most sense for your specific circumstances.

How QDROs Affect Taxes on Retirement Accounts After Divorce

A Qualified Domestic Relations Order (QDRO) is a legal order that allows for the division of certain retirement accounts (like 401(k)s or pensions) during a divorce without incurring taxes or early withdrawal penalties.

When handled properly, the recipient spouse can roll the distributed amount into their own IRA. However, if the funds are withdrawn as cash, taxes will be applied, and a penalty may be assessed unless the recipient is over 59½.

It’s essential to ensure your divorce settlement clearly outlines any retirement fund divisions and that a QDRO is submitted and approved by the plan administrator.

Taxation of IRA Transfers in Divorce

Unlike 401(k)s, IRA transfers after divorce do not require a QDRO. However, they must be made according to a divorce decree to avoid taxes.

If an IRA is split improperly, for example, by withdrawing funds and transferring manually, taxes and early withdrawal penalties may apply. Always handle these transfers as trustee-to-trustee direct rollovers with clear court documentation.

Innocent Spouse Relief: Protection From Past Filing Liabilities

If you filed joint returns during your marriage and later discover that your spouse underreported income or falsely claimed deductions, you may be able to apply for Innocent Spouse Relief from the IRS.

This program relieves you from responsibility for paying taxes, interest, and penalties caused by your spouse’s errors. To qualify, you must prove that:

• You did not know about the understatement.
• It would be unfair to hold you liable under the circumstances.

The IRS also provides Separation of Liability Relief and Equitable Relief, depending on your filing history and divorce status. This is especially important for those exiting a marriage with financial uncertainty or past tax mistakes.

Tax Credit Eligibility: Know the Income Thresholds

Many divorced parents are confused about which credits they qualify for. Here are the 2024 income thresholds for key credits:

• Child Tax Credit: Phases out at $200,000 for single filers and $400,000 for joint filers.
• Earned Income Tax Credit (with one child): Max AGI is $46,560 for single/head of household.
• Dependent Care Credit: Up to 35% of qualifying childcare expenses, reduced for higher incomes.
• American Opportunity Tax Credit (AOTC): Phases out starting at $80,000 for single filers.

These numbers change yearly, so always check the latest IRS publications or consult a tax professional.

Common Tax Mistakes Divorced Parents Make

• Both parents are claiming the same child without communication or a Form 8332.
• Assuming child support is deductible (it’s not).
• Missing out on Head of Household status due to incorrect assumptions.
• Filing jointly after the divorce is finalized.
• Forgetting to update Form W-4 after custody changes.

Avoiding these errors can prevent refund delays, penalties, or audits. If you’re unsure, professional legal and tax guidance is highly recommended.

Contact Reape Rickett for Trusted Legal Support

Your financial well-being after divorce depends on making the right decisions today. Let the team at Reape Rickett guide you through every step, including child custody, property division, and tax implications.

Visit https://divorcedigest.com/ to schedule a personalized consultation with a Reape Rickett divorce attorney and secure the support you need.

FAQs About Taxes and Divorce

What happens if my ex-spouse has already claimed our child?

The IRS will apply tie-breaker rules. You’ll be asked to provide documentation, and the claim may be denied or delayed. You may need to amend your return or provide Form 8332.

Can I claim my child if I pay child support but they don’t live with me?

No, unless the custodial parent provides Form 8332, which gives you the right to claim the child. Child support payments alone do not grant dependency claim rights.

Do I need to pay taxes on assets received in a divorce?

Not at the time of transfer. However, you may owe capital gains taxes if you sell those assets later, such as real estate or investments.

How do I handle joint retirement accounts in a divorce?

Use a QDRO for 401(k) or pension plans to avoid taxes and penalties. For IRAs, ensure that transfers are made in accordance with the divorce decree and are executed directly between the custodians.

Can both parents split the Child Tax Credit?

No. Only one parent can claim the child and the associated credit per tax year.