Who claims the kids? Under the tax code, the parent who has the most physical custody time with the children or is otherwise designated the residential custodian has the right to claim the children as dependents. However, federal law allows the residential parent to sign a waiver of the deduction over to the other parent in any given year. If the non-custodial parent sees real value in having the deduction, that parent should fight for the waiver provision in the dissolution.
What filing status do I choose? If you are divorced during the calendar year, you file as a single individual. You can claim head of household status if you had a dependent live with you for more than half of the year. If you are not divorced yet, you can choose to file a joint return or as married filing separately; you would have to consult your accountant to determine which approach would produce a smaller tax burden.
What if I sell the house? Often spouses sell the marital home at the time of divorce. Most spouses know that a profit from the sale of the house results in a capital gain; fewer know that you can write off up to $250,000 per spouse on the capital gains if you owned and lived in the house for at least two years prior to sale.
What about medical expenses? If you pay any of the medical expenses for your children, even if you are not a joint custodian, you may deduct all of these expenses as part of your overall medical expenses for the year – and that includes payment for health insurance.
Are legal fees deductible? Generally, no. However, legal work on maintenance issues or tax issues are deductible, so if your lawyer itemizes those hours on a client bill you could deduct those fees.
What about IRA contributions? If the court awards one spouse part of the retirement funds in the name of the other spouse, the spouse can avoid a capital gains tax by putting those funds into a separate IRA account (a rollover) within six months after receiving the funds. Otherwise, the receiving spouse has to pay a hefty double tax – capital gains and income.
If you have other questions about tax issues in divorce, contact us – we can help.