March 01, 2010

After the documents are signed, the assets transferred, and the myriad other tasks associated with finalizing a divorce are complete, newly divorced taxpayers realize that their tax status has changed. Following are answers to some of the questions that I receive most often from newly divorced taxpayers.

1. What is my filing status in the year of my divorce?

Your filing status is determined as of the last day of the calendar year. You are considered unmarried for the whole year if, on the last day of your tax year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree.

Your filing status will be either single or head of household.

2. How can I qualify to file as head of household?

In general, you must meet all the following requirements to file as head of household.

1| You are unmarried or “considered unmarried” on the last day of the year.
2| You paid more than half the cost of keeping up a home for the year.
3| Your home was the main home of your child for more than half the year.
4| You must be able to claim an exemption for the child. However, you meet this test if you cannot claim the exemption only because you waived the right to claim the child pursuant to your divorce decree.

This is a physical presence test and cannot be negotiated between the parties.

3. What if my ex and I have the child an equal amount of time?

If the child lived with each parent the same amount of time during the year, the parent with the higher adjusted gross income has the right to the head of household filing status.

4. Who claims the exemptions for our children?

In most cases, a child of divorced or separated parents will qualify as a dependent of the custodial parent under the rules for a qualifying child. However, the noncustodial parent may be able to claim the exemption for the child if the special rule (discussed next) applies.

Special rule for divorced or separated parents. A child will be treated as the qualifying child or qualifying relative of his or her noncustodial parent if all of the following apply.

1| The parents:
a. Are divorced or legally separated under a decree of divorce or separate maintenance,
b. Are separated under a written separation agreement, or
c. Lived apart at all times during the last 6 months of the year.
2| The child received over half of his or her support for the year from the parents.
3| The child is in the custody of one or both parents for more than half of the year.
4| The custodial parent signs a written declaration, discussed later, that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return.

If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived for the greater part of the rest of the year.

Example

Under the terms of your divorce, your child lived with you for 10 months of the year. The child lived with your former spouse for the other 2 months. You are considered the custodial parent.

Written declaration. The custodial parent must use either Form 8332 or a similar statement (containing the same information required by the form) to make the written declaration to release the exemption to the noncustodial parent. The noncustodial parent must attach the form or statement to his or her tax return.

The exemption can be released for 1 year, for a number of specified years (for example, alternate years), or for all future years, as specified in the declaration. If the exemption is released for more than 1 year, the original release must be attached to the return of the noncustodial parent for the first year, and a copy must be attached for each later year.

If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent can attach certain pages from the decree or agreement instead of Form 8332. To be able to do this, the decree or agreement must state all three of the following.

1| The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support.
2| The custodial parent will not claim the child as a dependent for the year.
3| The years for which the noncustodial parent, rather than the custodial parent, can claim the child as a dependent.

The noncustodial parent must attach all of the following pages of the decree or agreement to his or her return.

1| The cover page (write the other parent’s social security number on this page).
2| The pages that include all of the information identified in items (1) through (3) above.
3| The signature page with the other parent’s signature and the date of the agreement.

The noncustodial parent must attach the required information even if it was filed with a return in an earlier year.

5. I am the custodial parent. Can I revoke a prior release of the exemption?

For tax years beginning after July 2, 2008 (the 2009 calendar year for most tax payers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332 or similar form. The revocation is effective no earlier than the tax year beginning in the calendar year following the calendar year in which the custodial parent provides, or makes reasonable efforts to provide, the noncustodial parent with written notice of the revocation. Therefore, if the custodial parent provides notice of revocation to the noncustodial parent in 2009, the earliest tax year the revocation can be effective is the tax year beginning in 2010. You can use Part III of Form 8332 for this purpose. You must attach a copy of the revocation to your return for each year you claim the child as a dependent as a result of the revocation.

If the divorce or separation agreement went into effect after 1984 and before 2009, the noncustodial parent can still attach certain pages from the decree of agreement instead of Form 8332. For any decree or agreement executed after 2008, Form 8332 or similar form must be used.

Caveat: If the revocation is in violation of a decree or judgment, the noncustodial parent will have recourse in court to enforce the judgment.

6. Who can take the child tax credit, the credit for child care expenses, the exclusion for dependent care benefits, and the earned income credit?

If a child is treated as the qualifying child of the noncustodial parent, the noncustodial parent can claim an exemption and the child tax credit for the child.

Only the custodial parent can claim the child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, and the earned income credit. These tax benefits are available to the custodial parent even if the custodial parent waives the right to the exemption for the child.

7. Who claims the overpayment on our prior year joint tax return that was applied to the year after our divorce? Who claims the estimated tax payments we made toward taxes in the year after our divorce?

If you and your spouse made joint estimated tax payments for the year of divorce or applied an overpayment from the prior year, but file separate returns, either of you can claim all of your payments, or you can divide them in any way on which you both agree. If you cannot agree, the estimated tax and overpayment you can claim equals the total estimated tax paid times the tax shown on your separate return for the year before your divorce, divided by the total of the tax shown on that return and your spouse’s return for that year.

If you claim any of the payments on your tax return, enter your spouse’s or former spouse’s social security number in the space provided on the front of Form 1040 or Form 1040A. If you were divorced and remarried in the same year, enter your present spouse’s social security number in that space and enter your former spouse’s social security number, followed by “DIV” to the left of Form 1040, line 63.

8. I am going to remain in the marital home. Am I entitled to take 100% of the deductions for the mortgage interest and property taxes?

The deductions for mortgage interest and property will be determined based on several factors, including the form of ownership post-divorce, liability on the mortgage, and the terms of the judgment or separation agreement. The general rules for deductibility of mortgage interest are as follows:

  • The home must be a “qualifying residence” defined as the taxpayer’s principal residence and a second home. If one party vacates the marital home, he or she may elect the marital home as a second residence provided he or she uses the home for personal purposes for 14 days during the year. Use of the home by a taxpayer’s child is attributed to the taxpayer.
  • The taxpayer must remain liable on the mortgage loan to take the interest deduction.
  • If property is owned as joint tenants with survivorship rights, the joint owner who makes the payments is entitled to the deduction.

We will now look at two of the more common forms of post-divorce ownership as they relate to the deductibility of interest and taxes:

Joint ownership with rights of survivorship, both parties jointly and severally liable on the mortgage.

Assume that the husband will pay all the expenses pursuant to the judgment. Assume also that the wife will remain in the marital home with a child of the parties.

In this situation, the husband can deduct 50% of the mortgage interest as interest on a second home. He can also deduct 50% of the mortgage interest (as well as the principal payments) as deductible alimony if the judgment so provides and the payments meet all the requirements of deductible alimony. The husband can also deduct 100% of the property taxes because he is making the payments.

In this scenario, the wife will report taxable alimony and deduct 50% of the mortgage interest.

Tenants in common (no rights of survivorship), both parties jointly and severally liable on the mortgage.

Assume again the husband will pay all the expenses pursuant to the judgment and that the wife will remain in the marital home with a child of the parties.

In this situation, the husband can deduct 50% of the mortgage interest as interest on a second home. He can also deduct 50% of the mortgage interest (as well as the principal payments) and 50% of the property taxes as deductible alimony if the judgment so provides and the payments meet all the requirements of deductible alimony. The husband can deduct only 50% of the property taxes, the extent of his ownership interest.

In this scenario, the wife will report taxable alimony and deduct 50% of the mortgage interest and 50% of the property taxes.

9. I am going to remain in the marital home until my youngest child graduates from high school. When the home is sold, can my ex and I both claim a $250,000 exclusion from gain?

A home must be owned and used as a principal residence by the taxpayer for two (2) out of the five (5) years preceding the sale. In the above examples, the husband retained an ownership interest in the home but would not necessarily satisfy the use requirement absent a special provision. Internal Revenue Code Section 121 provides that the use of the home by the former spouse is attributed to the other spouse, if specifically provided for in the judgment or settlement agreement.

While these questions are often raised post-divorce, keeping them in mind during settlement negotiations can often result in a “tax-friendly” divorce.

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