What Divorced or Separated Means for Your 2016 Taxes

Tax Questions and Answers for the Newly Divorced or Separated

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Tax time can bring on more headaches in some years than in others. If you separated from your spouse or were divorced in 2016, you’re facing a whole lot of issues you haven’t had to deal with before, and you probably have several questions, too. Here are a few tax rules to keep in mind as you prepare your 2016 return.

Are You Married or Single?

This question isn’t as black-and-white as it seems on the surface, and it’s important because it can affect your filing status.

Under IRS rules, you’re technically still married if your divorce is not final yet as of Dec. 31, even if one of you filed for divorce during the year. Likewise, if the court issued your divorce decree on Dec. 31, you’re considered unmarried for the whole year and you must file your taxes as a single person. It doesn’t matter if you and your spouse have been living separately — you’re still married according to the tax code unless a court order states that you're divorced or legally separated. If you’re separated by court order on Dec. 31, not just living apart on your own terms, you’re no longer married and you must file a single return.

Should You File a Joint Married Return If You're Still Married? 

You have the option of filing a joint married return with your spouse if you're still married in the eyes of the IRS on Dec. 31. This can be beneficial because — among other things — it makes you eligible for the highest standard deduction when you combine your incomes on the same return.

But there’s a downside to filing together, too, particularly if your marriage is on the brink of being over.

You become jointly and severally liable for all taxes due when you file a joint return, even on income, your spouse personally earned. For example, if you earned $20,000 in 2016 and he earned $80,000, the IRS can collect taxes due on that $80,000 from you if he doesn’t pay them.

If he’s less than honest about his income or if he fraudulently claims a credit or deduction, you’re on the hook for these misdeeds, too. You can deny liability subject to certain rules, but this may be a problem you don’t need when you’re trying to put your marriage behind you.

Can You File as Head of Household?

Here's where it gets a little complicated. You’re not necessarily limited to filing a joint married or separate married return if you’re still married, nor must you absolutely file a single return if you’re technically divorced because another filing status exists: head of household, which can be very beneficial. Filing as head of household allows you to claim a larger standard deduction and you can earn more income before climbing into a higher tax bracket. It can also affect your eligibility for certain tax credits. But there are some strict rules. 

You might qualify as head of household even if your divorce isn’t final by Dec. 31 if the IRS says you’re “considered unmarried.” According to IRS rules, this means:

  • You and your spouse stopped living together by no later than May 31 of the tax year.
  • You paid at least 51 percent of the cost of maintaining your home for the year.

You must also meet a few other requirements:  

  • You have a dependent — typically your child, but other relatives can qualify, too – who lived with you for more than half the year.
  • You have the right to claim your dependent on your tax return, even if you don’t actually do so. For example, you would have been entitled to claim your child except you gave your spouse the right to do so as part of your divorce terms. A parent who is entitled to claim a child as a dependent can transfer her right to the other parent by signing and submitting Form 8332 to the IRS.
  • You must file a separate tax return from your spouse to claim head of household filing status. If you file a joint married return, neither you nor your spouse qualify as head of household.

Who Gets to Claim the Kids?

Now, about those dependents. The IRS says that only one parent can claim a child on his tax return in any given year.

If you have two children, it’s perfectly OK for you to claim one while your spouse claims the other ­— in fact, this is somewhat common after separation or divorce. But if you have only one child or you have an odd number of children, you and your spouse can’t simultaneously claim any of them in the same tax year. If you do, you’re probably opening yourself up for an audit. The best case scenario is that the IRS will simply give the deduction to the parent who meets its tiebreaker rules. 

So what are the official tiebreaker rules? The dependent deduction goes to the parent with whom the child lived most during the year, typically the custodial parent. Given that there are an odd number of days in the year, a child almost always lives with one parent at least one more day than the other. But if the child spent a little time living with another relative and with each of her parents exactly equally, the IRS moves on to the second tiebreaker rule: The dependent deduction goes to the parent with the highest adjusted gross income or AGI.

In addition to the tiebreaker rules, your child must live with you for more than half the year to qualify as your dependent. She cannot provide more than half her own support, and she must be under age 19, or age 24 if she’s still a full-time student.

Can You Deduct That Child Support You’ve Been Paying?

Unfortunately, the answer is no. The IRS takes the position that if you and your ex had remained married and if your family had remained intact, you could not have claimed a tax deduction for money you spent feeding, clothing and sheltering your children. Those are personal expenses, and they’re still considered personal expenses after you divorce. The child support you pay is for benefit of your kids, so your ex doesn’t have to claim it as income, either. Neither do your kids. Child support is a tax-neutral exchange of money.

What About Alimony?

Alimony is a different story. If you’re paying alimony subsequent to the terms of your divorce or separation decree, the IRS says this is income that your ex can now spend as she sees fit. It was taxable income to you when you earned it, but as it turns out, you don’t have the use of this money. Therefore, you get to take an above-the-line deduction on the first page of your tax return for the amount you paid – you don’t have to pay taxes on this portion of your income.  

The “above-the-line” distinction is important. It means you don’t have to itemize to claim the deduction, and itemizing isn’t always to every taxpayer’s advantage. Basically, all your itemized deductions would have to add up to more than the standard deduction for your filing status or you’d end up paying taxes on more income than you would have if you had just claimed the standard deduction in the first place. But this rule doesn’t affect alimony because you get ​to deduct it from your income before you get around to deciding if itemizing or claiming the standard deduction is in your best interests.

Certain rules apply to claiming an alimony deduction as well:  

  • The payments must be specifically mentioned and referred to as alimony or spousal support in your divorce decree, separation decree or another family court order. The order must legally obligate you to pay this sum to your ex.
  • Payments must be made in cash, not in property. Checks and electronic transfers count as cash.
  • You have to give the IRS your ex’s Social Security or other tax identification number. If you don’t, you’re subject to a $50 fine as of the 2016 tax year, and the IRS can disallow the deduction.
  • If your situation meets all these criteria, enter the amount you paid on line 31a of your 1040. Enter your spouse’s Social Security number on line 31b. You can’t claim the alimony deduction if you file Form 1040NR, 1040EZ or 1040A.

Do You Have to Claim Alimony as Income? 

And what about your ex? Does she get to enjoy this income tax-free? Not a chance. The IRS wants somebody to pay taxes on it and now that one spouse has claimed the deduction, responsibility shifts to the spouse who received the money. She must enter the amount on line 11 of her 1040, or on line 12 of Schedule NEC if she files Form 1040NR. She can’t file Form 1040A or 1040EZ.

And for what it’s worth, if she refuses to give you her Social Security number and you can’t find it from previous tax returns the two of you filed together, she has to pay the $50 fine.

Can You Deduct the Costs of Your Divorce?

So now you know who can claim your children as dependents and you understand how to deduct or claim as income that alimony that’s been changing hands. Your divorce attorney has presumably figured out all the tax ramifications of the property exchange provided for in your divorce settlement or decree. But arriving at that property settlement, agreeing on custody terms and hammering out the alimony order cost you a ton in legal fees. Can you deduct those?

Yes and no. You can’t deduct fees associated with getting you divorced, nor can you deduct most court costs. But you can deduct fees you paid that were associated with earning income that the IRS can tax you on, such as if you had to pay a lawyer to get an alimony order. You can deduct fees you spent on tax advice. Your attorney must break down his charges into two separate invoices, showing what you paid for the divorce in general on one and what you paid for tax-deductible services on the other. And the amount of alimony you received all year must exceed 2 percent of your AGI.

Now here’s the bad news: Legal and professional fees are not an above-the-line deduction. You have to complete Schedule A and itemize to claim it.