Divorce Tax Considerations
Divorce is a tough process, and one that
doesn’t end after a court date. Knowing
your rights and obligations and
understanding tax implications will make
the process less difficult.
The pain of divorce can be made worse by
its tax consequences, particularly when
they are unforeseen.
In general in a divorce, two tax
considerations are 1) tax consequences,
which include incomes and deductions of
the spouses, number of dependents,
credits, tax rates and the amount tax paid
to avoid penalties, and 2) legal liabilities,
particularly those associated with a married
filing jointly, which include joint and several
liability.
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 Getting a copy of Tax Return Information
for previous years can help uncover
hidden assets, give you proof of your
spouse’s income, and reveals retirement
accounts.
o Getting a copy of tax return data for at least
the three previous tax years is important
when going through divorce, especially if
you signed the returns without looking at
them.
o This will help your lawyer uncover hidden
assets, reveal retirement accounts, and give
your proof of your spouse's income, and
can also help you in the event of an IRS
audit.
o You have a legal right to a copy of any joint
income tax returns that were signed by
both you and your spouse.
o You can get a copy of your returns from the
IRS, sometimes from the state, from a paid
preparer, or from your spouse who filed the
taxes. The IRS provides tax return
transcripts for 1040, 1040A, and 1040EZ
returns. Request for transcripts can be
made by calling 1-800-829-1040.
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 Filing a Joint Tax Return Before The
Divorce is Finalized
o
Your tax filing status depends on your marital
status on the last day of the tax year.
- If you are unmarried, your filing status is single or
head of household.
- If you are married, your filing status is either married
filing a joint return or married filing a separate return.
o You must also follow your state law to
determine whether you are considered
divorced or legally separated.
o Even if you live separately, as long as you
were still married you have the option to
file married filing jointly.
o More often than not there is a monetary
advantage to the filing status married filing
jointly. But remember that you can only file
a joint return if you are married.
o If you decide to file "Married Filed
Separately," you cannot claim Earned
Income Tax Credit.

So, if you have children and your income
qualifies you for Earned Income Tax Credit,
you may consider working together to file
jointly and share the amount of the Earned
Income Tax Credit.
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 Capital Gains Tax in Divorce Settlements
o Addressing the capital gains tax in divorce
settlements is something that is often
overlooked when couples split up. If you
will be keeping the marital home, you need
to consider how the eventual sale of the
home will affect your taxes when drafting
your divorce agreement.
o In order to qualify for an exclusion, your
home must be your primary residence and
you must have owned and occupied your
primary residence for at least two of the
last five years prior to the sale.
o To figure the gain on the sale of your home
you will need to know your basis. For most
people, it is the original amount you paid
for your home. However, if you have made
any improvements or taken any deductions
then you will need to calculate your
adjusted basis.
 For example, if the original cost of your
home was $200,000 and you added a
$10,000 pool, your adjusted basis
becomes $210,000. If you then took an
$8,000 loss for a flood, your adjusted
basis becomes $202,000.
o To calculate your profit or loss, you should
subtract the adjusted basis from the selling
price of the home. If the number is positive,
you have a gain. If the number is negative
you have incurred a loss. Your taxable gain
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is determined by subtracting the maximum
allowable exclusion from any profits.
o If you find that you have a taxable gain, you
should consider inserting a clause in your
divorce agreement that states: The parties
agree that the real estate, located at X
Street, Xville, Arkansas, zip code, shall be
listed for sale at market price. Net proceeds
of this sale after deduction of all expenses,
taxes, liens and mortgages will be divided as
follows – X% to the Wife and X% to the
Husband.
 Child Tax Credits After Divorce - Find
out if you qualify for a child tax credit,
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child care credit, earned income credits,
or any education tax credit.
o In general, there are four different types of
child tax credits that divorcing parents
should understand before resolving which
parent will claim the dependency
exemption and/or how joint custody should
be addressed in an agreement.
o Child Tax Credits (For Parent Claiming
Dependent)
 Taxpayers may be able to claim a child
tax credit of $1,000 for each qualifying
child. In this case, a qualifying child is
one that is claimed as a dependent,
was age 16 or younger at the end of
the year, and is a child that is the
taxpayer's own (or that of their brother
or sister and is cared by them as their
own child). The child tax credit is
phased out if adjusted gross income is
above $75,000 for Head of Household
and Single filers. Note this credit is
refundable.
o Child and Dependent Care Credit (Claimed
by Custodial Parent)
 If a custodial parent pays for care for a
qualifying dependent that was age 12
or younger when the care was
provided or for other dependents that
are not able to care for themselves,
then they may be eligible for the child
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and dependent care credit. To qualify,
one must satisfy all of the IRS tests
summarized below:
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You must keep up a home that the
dependent lives in - paying at least half of
the cost associated with owning and
running the home.
You must have earned income for the year,
and the payments for care were required
to earn income.
You must identify the care provider on
your taxes and they cannot be someone
you could claim as a dependent (i.e. not an
older child).
Your tax filing status cannot be married
filing jointly or qualifying widow(er)
without a dependent.

This credit can be up to 35% of up to
$3,000 of expenses associated with the
care of one individual or up to 35% of
$6,000 for two or more individuals. If
the taxpayer's adjusted gross income is
more than $15,000, they will receive
less than the full credit (i.e the "phase
out" begins). However, for taxpayers
with more than $45,000 of adjusted
gross income, the credit is still 20% of
qualifying expenses (i.e. up to $600 for
one child, $1,200 for two or more).
Note this credit is not refundable.
o Earned Income Credits (Claimed by
Custodial Parent)
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
The earned income tax credit (or EIC) is
a refundable credit that is often the
most valuable of all the tax credits. It
can only be claimed by the custodial
parent. The value can be slightly more
than $3,000 if the taxpayer has one
child to more than $5,500 for three or
more children. To claim the credit, a
taxpayer must have earned income of
less than $35,000 with one qualifying
child and up to $45,000 for three or
more qualifying children.
 There are other qualifying rules, and as
was the situation with the Child and
Dependent Care Credit, a worksheet is
provided on the 1040 tax form to
calculate the exact earned income
credits.
o Education Tax Credits
 There are two tax credits that presently
apply to education - the American
Opportunity Tax Credit ("AOTC") and
the Lifetime Learning Credit ("LLC"). In
any year, a parent claiming a
dependent can only take one of the
credits.
 The maximum AOTC is $2,500 and is
subject to phase out when modified
adjusted gross income is over $80,000
(or $160,000 for jointly filed returns).
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
40% of the credit is refundable. Note
this credit is due to expire in 2011.
The LLC is 20% of the first $10,000 paid
for qualifying tuition and related
expenses each year. The maximum
credit is currently $2,000. Expenses for
graduate and undergraduate work are
eligible. There is no limit on the
number of years that this credit can be
claimed. The amount of the credit is
phased out if modified adjusted gross
income is between $50,000 and
$60,000 ($100,000 and $120,000 if you
file a joint return).
Often it is the case that after divorce, one
taxpayer can benefit from the above tax
credits to a greater extent than the other.
So, when negotiating a divorce settlement,
learn how the various tax credits would
benefit each party. Splitting dependency
exemptions is a common practice, but may
not take into account how the various tax
credits benefit each taxpayer.
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 Post Divorce Taxes and Claiming the
Children - Who gets to claim the child
exemption, files as head of household,
and takes the Health Savings Account tax
deductions.
o Post divorce taxes are affected by who gets
to claim the child exemption, files as head
of household, and takes the Health Savings
Account tax deductions.
o Your divorce decree may specify how this
exemption is to be taken. Some parents
alternate years. Sometimes one parent
always gets it. However, you are permitted
to change this if you both agree to do so.
You may be in a situation where one parent
earns a lot more than the other this year
and the exemption will be of more value to
that parent (always check with your tax
preparer to find out if and how you will
benefit from taking the exemption).
 If you want to shift the exemption to
the other parent, there is an IRS Form
8332 that allows you to do so.
 In amicable divorces, it’s not usual to
see ex-spouses “trade” off the child
dependency exemption. They can do
so, and claim related tax breaks each
tax year by filing IRS Form 8332.
o Default Rule: If your divorce decree does
not specify which parent gets the
exemption, the parent who has the child for
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the most nights in the year is the parent
entitled to take the exemption. Period. It
has nothing to do with who pays child
support or how much is paid or what kinds
of expenses the child has.
o MSA and Health Savings Account Tax
Deductions. Although the IRS has a hard
and fast 50% rule for the dependency
exemption, it is possible for both parents to
claim children for the purposes of Medical
Savings Accounts (MSAs) and Health Savings
Accounts (HSAs). If you have one of these
employer-provided benefits, check with
your tax preparer about claiming your child.
 Head of Household Tax Filing Status
o Head of Household Status is separate from
the dependency exemption. Even if your ex
takes the dependency exemption, you may
qualify for head of household if your child
lived with you more than half the time, you
paid more than half of your household
expenses and you are unmarried
o Filing as Head of Household ("HOH") can
save up to $8,000 per year over filing as
Single. Therefore, it is critical to evaluate
the post-divorce tax filing status for each
party when negotiating a settlement. This
requires thought and agreement beyond
determining who will claim a child as a
dependent.
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o Most people are under a misconception
that claiming a child as a dependent entitles
them to file HOH. To qualify, you must
satisfy all of the following requirements:
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You must be unmarried at the end of the year
or live apart from your spouse for more than
six months;
You must maintain a household for your child
(even if you do not claim them as a
dependent), or a dependent parent, or other
qualifying dependent relative;
The household must be your home and
generally must also be the main home of the
qualifying dependent (i.e. they live there more
than half the year);
You must provide more than half the cost of
maintaining the household; and
You must be a U.S. citizen or resident alien for
the entire tax year.
As indicated above, a taxpayer does not need
to claim a dependency exemption to file HOH.
So, for a custodial parent, even in years when
you "give" (by completing IRS Form 8332) the
dependency exemption to you ex-spouse, you
can still file HOH.
o The key to ensuring Head of Household tax
filing status generally lies in the custody
arrangement. If an agreement provides
joint custody, it may be helpful to indicate
in the agreement which child lives with
which parent for more than one half of the
year.
o If there are two children, both parents can
qualify as HOH, so long as one child lives
with one parent more than half of the year,
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and the other child lives with the other
parent more than half of the year. If
audited, the parents will need to provide
evidence that the dependent child spent
more than 182 nights with the appropriate
parent.
o Note that if one qualifies as Head of
Household, they generally qualify to benefit
from any related "dependent care credit"
and/or "Earned Income Tax Credit" that
may be applicable. The party taking the
dependency exemption generally qualifies
to benefit from the "child tax credit" and
any extra stimulus rebates that may be
provided in a given tax year.
 The Dependent Tax Deduction after
Divorce.
o In 2008, the IRS amended Section 152(e),
which deals with dependency exemptions.
The changes to the tax code can be
summarized as follows:
 A divorce agreement or court order can
no longer be used as a substitute for
Form 8332.
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
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o
o
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The custodial parent, for 2009 and
forward, is the one with whom the
child resides the greater number of
nights during the year, regardless of
the terms of the divorce decree.
 The custodial parent can unilaterally
revoke the release of a child exemption
for calendar years 2009 and forward,
even if the release was made prior to
2009.
Given these changes, all non-custodial
parents who plan to take a dependency
exemption should obtain Form 8332 for
2009 and all future tax years.
For any future settlement agreements that
will include a provision for a non-custodial
parent to take a dependency deduction for
one or more children in one or more future
tax years, have the custodial parent
complete Form 8332 coincident with
executing a settlement agreement.
Do not forget that the individual claiming a
dependency exemption is entitled to
benefit from a Child Tax Credit and any
allowable Hope and/or Lifetime Learning
Educational Tax Credits.
For 2009, the Child Tax Credit phases out
from $75,000 to $95,000 (of Adjusted Gross
Income) and Hope and/or Lifetime Learning
Educational Tax Credits phase out from
$48,000 to $58,000 for single and head of
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household filers. The credits are generally
more valuable to low and middle income
filers than the dependency exemption
itself.
**Remember that the custodial
parent is the only parent eligible for
additional tax benefits, such as filing
as Head of Household, the Earned
Income Credit, and the Child and
Dependent Care Credit**
 Alimony and Child Support:
o Alimony is tax deductible to the person who
pays it, and included in the taxable income
of the person who receives it. Child support,
by contrast, is not considered taxable
income to the person who receives it and
not tax deductible to the person who pays
it.
o When two parties to a divorce have
dramatically different incomes, there may
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be some tax advantages to using alimony,
even if a judge wouldn't ordinarily award it.
 A spouse with a significantly larger
income could pay a substantial alimony
instead of child support.
 Many times, the spouse with the large
income can afford to pay enough
alimony to compensate the recipient
spouse for the extra tax they will have
to pay and still save money.
o In order for payments to an ex-spouse to
constitute alimony, there are several
requirements that you have to satisfy. They
are outlined in IRC §71.
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The payments must be in cash, checks, or
money orders. Alimony cannot be made in
debt, property, or services.
The payments must be provided for in a
divorce or a written agreement.
You can't claim alimony during any year for
which you file a joint tax return.
You can't claim alimony while sharing a
residence with your spouse.
The payments have to stop when the
recipient divorcee dies.
o If both parties to the divorce have similar
incomes, it is probably best to use child
support instead of alimony. The noncustodial spouse making the payments is
likely unable to compensate the custodial
parent for the extra taxable income they
must claim on their taxes.
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Please call Legal Aid of Arkansas with your divorce
and taxation questions. Our helpline is available at
1-800-952-9243 for free help.
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