With a new year comes the filing of income tax returns. As you open your W-2 from your employer, you – like many going through a dissolution – may be wondering how you should file your tax return, who is going to claim the children as dependency exemptions and how to determine whether the support payments should be deducted or included as income. The first thing to know is that the answers to these questions are not necessarily the same for everybody. The tips your friend or relative gave you, as relayed by his or her accountant, may not be the best course of action for you. Given the complexity of tax laws, it is always a good idea to speak with a professional who can analyze your situation and advise as to the best course of action.
Before you go in though, it may be helpful to understand the basics of the issues that you’ll need to discuss. When deciding how to file, remember that your filing status is determined by your marital status on the last day of the calendar year. If still married, you and your spouse must decide whether you will file your returns jointly or separately.
If filing separate returns, you must determine who will claim the children as dependents. The general rule is that the primary custodial parent will take the exemption, but that parent can release the exemption to the other. In doing so, the custodial parent may lose certain benefits such as the head of household filing status or the so-called kiddie tax rebate. Releasing the exemption will also impact the calculation of guideline child support, which is done considering the tax factors for each parent.
Another key issue is whether support paid or received should be deducted from income by the payor and included in the payee’s income. The general rule is that the payee’s gross income does not include amount received for child support, but does include money received for spousal support/alimony. To be deemed spousal support, the payments must meet the federal Internal Revenue Code’s numerous requirements. This requires, among other things, that the payment be made in cash by or on behalf of a spouse under a written divorce or separation agreement or decree.
The basics of how your dissolution impacts your income taxes, and how your income taxes impact your dissolution, are not only helpful at tax time. Understanding these concepts also may contribute to informed decisions that can ease and simplify your dissolution – making your education a worthwhile investment.