Nolo's Essential Guide to Divorce - Emily Doskow [98]
Taxes and Your Children
You're probably used to taking your kids into account when you do your taxes each year. With your divorce, there's more to think about, including how you'll share exemptions, credits, and deductions and how you and your former spouse will file.
Tax Basics
If you pay child support, you can't deduct it; if you receive it, it's not income. In other words, child support payments are tax-neutral. (The rules for spousal support are different; see Chapter 11.)
Exemptions for Dependents
When you file your personal income tax return, you are allowed one exemption for each person you claim as a dependent. The dependent exemption amount changes periodically; in 2007 it was $3,400. Your child qualifies as a dependent if all three of these conditions are met:
• the child is under 19 at the end of the year, is under 24 and a full-time student, or is disabled
• the child lived with you for more than half the year, and
• the child didn't provide more than half of his or her own support during the tax year.
This means that most children living at home qualify as dependentsand that most children are the dependent of the parent who has physical custody, because the child lives with that parent for more than half the year.
However, you can agree that the noncustodial parent may take the dependent exemptions for your children, or for some of them. If you're the noncustodial parent, you can take the exemption under the following circumstances:
• you and your spouse are legally divorced, are separated under a written separation agreement, or lived apart for the last six months of the tax year
• your child lived with you or your spouse, or both, for at least half the year
• you and your spouse paid more than half of your child's support during the year (the rest can be paid by other relatives or public benefits), and
• your divorce order or separation agreement says that you can take the exemption, or your spouse signs a declaration giving up the exemption.
Your settlement agreement will be incorporated into your final divorce order, so saying what you want to do about the exemptions in the settlement agreement will take care of the last requirement. The custodial parent can give up the exemption for one year, all future years, or specified future years (for example, the next five years, or alternating years until the child is an adult).
Divorcing parents with more than one child sometimes consider splitting exemptions, with each parent taking the exemption for one child. You can certainly do this, but check to see whether it really means a tax advantage for both parents. If you're not sure what to do about your exemptions, have a tax professional calculate what your taxes would look like if one parent takes all the exemptions and if the exemptions are split. Then do whatever is most advantageous for both of you.
If you and your spouse make a decision about the exemptions, include it in your settlement agreement. If you later agree that you want to change your decision, you can shift the exemptions by using IRS Form 8332. Because of the requirement that your agreement about dependent exemptions be in writing, be sure to use the form-don't just make the change yourselves.
Head of Household Status
If you have physical custody of at least one child, you may be able to file as head of household-it's a filing status, like "married" or "single." Your tax rate usually will be lower than if you file as single or married filing separately, and you will receive a higher standard deduction.
You can file as a head of household if you:
• are unmarried or "considered unmarried" (see below) on the last day of the tax year
• paid more than half the expenses of keeping up your household during the year, and
• had