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What you need to know about divorce and taxes

Gone with the Wind author Margaret Mitchell said: "Death, taxes and childbirth! There's never any convenient time for any of them." Mitchell could have easily included divorce on that list as well.

But, unlike with death, taxes and childbirth, people can usually choose when to file for divorce, and some base that decision on taxes.

What was your marital status on Dec. 31?

Your filing status for the tax year depends on what your marital status was on Dec. 31. If you were still married on Dec. 31, 2016, then you could file jointly one last time, even if your divorce was pending. However, if your divorce was finalized by that date, then you will have to file as a single taxpayer (or head of household status if you are a custodial parent).

For this reason, some people choose to wait until the new year to finalize the divorce process if the marital deduction will give them a lower tax bill.

Other divorce-related tax issues to keep in mind

If you have recently gone through divorce, are going through divorce or think a divorce may be in your future, then there are a few other things that you should know about the tax consequences of divorce, including:

  • Child support is not taxable, which means it is not treated as a deduction for parents paying support and it is not treated as taxable income for parents receiving support.
  • Alimony is taxable, which means the person receiving alimony must claim it on his or her tax return, and the person paying alimony can include it as a deduction.
  • Blended support (a mix of child support and alimony, sometimes called "family support") is fully taxable, just like alimony.
  • The IRS keeps a lookout for child support that is disguised as alimony, such as payments that are scheduled to end around a child's 18th or 21st birthday, or a non-tax deductable property settlement disguised as alimony, such as payments taking place in the first year or two after a divorce.
  • Only one parent can claim each child as an exemption per tax year. This is something that should be decided during the divorce negotiations and included in the final divorce decree.
  • The parent who has custody of the child for more than six months is entitled by tax law to claim the tax exemption for the child, but if your agreement says otherwise, that parent will need to sign an IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents).
  • You cannot deduct general legal fees relating to your divorce, but you can deduct fees that you paid for advice regarding the tax-consequences of your divorce.

As you can see, a divorce can affect your taxes in many different ways and you could end up owing much more (or less) than you have in previous years. It's best to get a professional's help, as well as advice from your lawyer, to make sure that you plan accordingly.

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