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By Irving H. Zaroff, JD LMFT and Dana Schutz, MA LMFT
"Everything appears to promise that it will last; but in this world nothing is certain but death and taxes.” So said Benjamin Franklin. While sometimes marriage also fails to meet the promise it will last, the taxman is eternal.
What are some of the tax concerns that divorcing couples might face? When there are children, two important factors to consider are the way child support payments are treated and the filing status of each parent.
Child support payments are not deductible by the paying parent and are not included in the income of the receiving parent. This is much different than spousal support where the paying spouse deducts the full amount of the payment and the receiving spouse includes the payments in income.
Filing status determines the tax rate each spouse will pay. Divorced spouses would typically file as “Individuals,” with the highest tax rates. When there are children, there is a category called “Head of Household” which is closer to the reduced tax rates enjoyed by married couples. In order to qualify for “HH,” a spouse must provide more than 50% of the costs to maintain his / her household; must be unmarried; and the household must be the primary residence for a qualifying individual (a child supported by the parents does qualify) that lives with the taxpayer more than one-half the year. It is possible, when there is more than one child, for both spouses to claim HH, providing each has physical custody for more than half the year.
A related tax benefit is the personal exemption available for a qualifying child. Unlike HH, this can be accomplished by agreement between the spouses and does not require the child live with the spouse claiming the exemption.
Another area of tax interest is the disposition of the family residence. Sales between spouses pursuant to a divorce will not trigger a taxable gain. The tax code provides a $250,000 exemption on gains from sale of a personal residence for an individual. If the house is sold after the spouses separate, as long as the spouse left pursuant to a divorce agreement, both may be entitled to the exemption.
Beware the pitfalls of the taxman and divorce. Get expert advice!