If your client is recently divorced or in the process of getting divorced, taxes probably aren’t the first thing on their mind. However, when filing season comes around, they’ll likely have questions about how to file and how their tax return could be affected. As their tax preparer, you can help them navigate the tax filing process with minimal confusion and stress. Here’s what you should know about helping them choose a filing status, claiming dependents, and handling child support and alimony payments.
Choosing a New Filing Status
Your client’s filing options depend on when the divorce will be finalized and whether your client can claim any dependents:
Married Filing Jointly
Of course, this option is only available if the divorce has not been finalized by the end of the year. Many couples who are separated and in the process of divorce still choose this option because it is often the most financially beneficial for both parties.
Married Filing Separately
Again, this option is only available if the divorce is not final at year-end. However, it is the best option for clients who are still legally married but do not wish to file with their spouse.
Head of Household
This option is available after the divorce has been finalized and if your client paid at least half the home upkeep costs and lived with a dependent for more than half of the year. Filing HOH gives your client a more significant standard deduction and lower tax bracket than filing single. Note that even if the custodial parent agrees to allow the non-custodial parent to claim some or all of the children as dependents, only the custodial parent can file HOH. Similarly, both parents cannot file as HOH for the same child/ children, even if they live with them for a nearly equal amount of time throughout the year
Single
If the divorce is finalized and your client cannot claim any dependents, their only option is to file as single.
Claiming Dependents
After a divorce, the custodial parent – the parent who lived with the child/ children for most of the year – has the right to claim them as dependents when they file taxes. The non-custodial parent – the parent who lived with the children for the least amount of time during the year – may still claim a child as a dependent if the custodial parent agrees and signs Form 8832.
In some cases, divorced couples choose to “split” claiming dependents if there are multiple children, especially if the children live with each parent nearly equally. If there is only one child, they might choose to alternate years where they claim the child as a dependent.
Of course, determining who claims dependents isn’t the tax preparer’s job. You should verify that your client is claiming dependents correctly and that their former spouse is not attempting to claim the same dependents. The parent who claims the children also benefits from certain tax credits like the Child Tax Credit and Child and Dependent Care Credit.
How to Handle Child Support
The parent who pays child support cannot deduct it from their taxable income, and the parent who receives child support does not have to report it as income.
Typically, child support is only relevant during tax filing if a parent is delinquent on child support payments. In this case, all or part of their tax refund may be seized by the IRS and distributed to the custodial parent to pay off the child support debt. As the tax preparer, you are not responsible for knowing whether your client is behind on child support payments and do not need to take any action regarding delinquent payments when you file your client’s taxes.
How to Handle Alimony
If your clients pay or receive alimony, they may ask if alimony is tax-deductible or if they will pay taxes on alimony. The answer depends on when their divorce and alimony agreement was finalized. Prior to 2019, alimony payments were deducted by the taxpayer making the payments as an adjustment to their gross income, and alimony payments were reported as income for the taxpayer receiving the payments.
The Tax Cuts and Jobs Act reversed how alimony is treated for all alimony agreements finalized on or after January 1, 2019. A taxpayer paying alimony can no longer deduct these payments as an adjustment to their income. Conversely, a taxpayer receiving the alimony payment will no longer have to include those payments as income. However, any alimony payments made by a taxpayer under an alimony agreement that was in effect on or before December 31, 2018 will continue to receive the historical treatment for both the payer and recipient of the alimony.
This creates three distinct situations for how alimony payments should be treated:
For taxpayers that get divorced (or legally separated) on or after January 1, 2019: Alimony payments are not deductible for the taxpayer making the payments and are not income for the taxpayer receiving the alimony payments.
For taxpayers that got divorced (or legally separated) prior to January 1, 2019, and are paying or receiving alimony under an agreement or court order that is dated on or before December 31, 2018: Alimony payments remain deductible for the taxpayer making the payments and remains income for the taxpayer receiving the alimony payments. Often, parties get divorced and enter into an agreement or have a court order that establishes the alimony payments, and it remains in effect and unmodified for years. As a result, some taxpayers may continue to deduct alimony payments or recognize alimony as income for many years because the underlying alimony agreement or order will remain unmodified and dated on or before December 31, 2018.
For taxpayers that got divorced (or legally separated) prior to January 1, 2019, and are paying or receiving alimony under an agreement or court order that is dated after December 31, 2018: Alimony payments are not deductible for the taxpayer making the payments and are not income for the taxpayer receiving the alimony payments. In this situation, the parties were divorced prior to January 1, 2019, but have modified their alimony agreement or have gone to court after December 31, 2018, and received a new court order that modified the alimony payments.
The information in this article is up to date for tax year 2021 (taxes filed in 2022).
