How to Divorce -- Taxes

How to Divorce – Taxes

Not many divorcing couples focus on the tax ramifications of a divorce.  In particular, if there are children involved, who gets the tax deduction for the child or children.  Some states provide that the tax deduction should be rotated on an annual basis between the parties.  This, however, creates a conflict with the federal mandate that the tax deduction should go to the party with whom the child or children have resided for the majority of the year.  In other words, the party with sole physical custody should always have the tax deduction.  

Some states further require that in order to claim the deduction, a part must be current on their domestic support obligations.  What is unclear is whether the party must only be current during the current tax year or have no arrearages whatsoever even from previous years.  This can create a situation where a party falls behind and may never be able to claim the tax deduction.  

There are several options for claiming the tax deduction on a rotating basis when more than one child is involved.   These options include splitting the tax deduction between the parties with each person claiming a child or if there are an odd number of children rotating the deduction on an annual basis for the odd child out.  Some parties also like to add provisions permitting the other party to buy out the deduction if they would receive a greater tax return.  This of course requires cooperation between the parties and the sharing of sensitive information.

With respect to the divorcing couple, they will need to decide whether they want to file jointly, married but filing separately or separately depending on the circumstances.  Each spouse must also be careful if the other spouse is preparing the taxes so that they do not get caught up in any issues with the IRS.