Tax Credits:
If you're the parent who claims the dependent exemption, you're also the one who can claim the child credit and the American Opportunity higher education credit or the Lifetime Learning higher education tax credit. If you can't claim the exemption, you can't claim these credits, even if you pay the education expenses. Only the custodial parent may claim the work related childcare credit, even if the noncustodial spouse takes the dependency exemption.
Child Support:
Regardless of who pays and who receives child support, child support is always tax neutral.
Alimony:
Alimony is taxable to the recipient and deductible by the payer, unless your Agreement or Court Order states otherwise. For the payments to be qualified as alimony, the alimony must be written out in an agreement, or as part of a court order or judgment.
Medical Expenses:
If you continue to pay your children’s medical expenses you may claim these expenses as a deduction regardless of whether you are considered the custodial parent and/or whether you are taking the dependency exemption.
Transfer of Assets:
If your divorce Agreement or Court Order transfers property from one spouse to the other, the recipient does not have to pay tax on the transfer. However, the property’s tax basis shifts and when the property is later sold, the recipient spouse will pay capital gains on the appreciation before, as well as after, the transfer.
Sale of the Marital Home:
When the marital home is sold, you may incur a capital gains tax. Single tax payers can usually avoid the tax on the first $250,000 of gain on the sale of their primary home if they have owned the home and lived there at least two out of the last five years. Married couples filing jointly can exclude up to $500,000 of gain as long as one of they has owned the home and both have used it as a primary home for at least two of the last five years. If the home is sold after divorce, and the two-year ownership and use tests are met, each spouse can exclude up to $250,000 in gain on their individual returns. Sales after divorce may also qualify for a reduced exclusion if the two-year test is not met. If one spouse receives the house as part of the divorce settlement, and the house is sold later, that spouse can only exclude up to $250,000 of gain.
Retirement Assets:
How you handle your retirement assets during divorce can have big tax implications. For example, if you cash out a 401(K) plan to provide your former spouse with funds, you will be required to pay tax and possibly penalties on that withdrawal. However, if funds from the retirement asset are transferred pursuant to a Qualified Domestic Relations Order (QDRO), you will not have any tax implications at the time of the transfer. While you do not need a QDRO to transfer an IRA, it does have to be transferred pursuant to a written Agreement to avoid the transfer from being treated as a taxable distribution.
(3/10/2015)
