Divorce and Taxes in 2018
A guide to healthy tax planning
Finances are the last thing you want to worry about when going through a divorce. Splitting assets and filing tax returns can often spur confusion, anxiety and tension — especially when you add newly passed tax reform into the mix. Here are some important tax considerations heading into 2018.
Couples often file joint returns for the tax benefits. Couples going through the separation process but not yet legally divorced before the end of the year may file jointly or separately. Once the divorce decree becomes final, couples lose the option of filing a joint return.
If the divorce is final by the end of the year, there is the possibility of filing as head of household. In order to qualify, the head of household must have had a dependent living with them for more than half the year and/or have paid for more than half the upkeep of their home.
Only one parent is permitted to claim a dependent each year. Generally, the parent with custody (the custodial parent) of the child the majority of the year claims the dependent. The non-custodial parent may claim the dependent exemption if the custodial parent signs a waiver foregoing their right to claim the dependent.
Regardless of custody, the parent that pays a child’s medical bills after the divorce can include those costs as a deduction on their tax return.
The Tax Cuts and Jobs Act significantly increases the child tax credit (previously $1,000 and now $2,000). The parent claiming the dependent exemption may be eligible to claim both the child tax credit and the American Opportunity higher education credit (up to $2,500), or the Lifetime Learning higher education tax credit of up to $2,000.
For children under the age of 13, the custodial parent may claim the child care credit for work-related expenses. However, only the custodial parent may claim the credit for childcare expenses, even if the other parent claims the dependency exemption.
Payments to ex-spouse
Previously, alimony payments were tax deductible by the payor spouse and includible in income by the recipient spouse. Under new tax law, for any divorce or separation agreement executed after December 31, 2018, alimony payments will no longer be deductible by the payor nor be includible as income of the payee.
Child support payments are not a taxable event. The parent paying child support will not receive a deduction and the parent receiving payment will not be required to pay income tax on those payments.
Couples who sell their home during their divorce will likely see capital gains tax implications. For those who have owned and lived in their home for at least two years out of the last five, the law generally allows tax exemption on the first $250,000 gain on the sale. Married couples filing jointly may exclude up to $500,000 so long as one of the spouses owned the residence and both resided in the home for at least two out of the last five years. These are referred to as the “ownership and use tests.”
Divorced couples who satisfy the ownership and use tests may exclude up to $250,000 of the gain on their individual tax returns. Additionally, divorced couples who did not own or reside in the home for more than two years may qualify for a reduced exclusion. For example, couples who lived in the home for one year may each exclude $125,000 of gain.
If one spouse receives the home in the divorce settlement and later sells the home, that person may exclude a maximum of $250,000 gain. Any time that the spouse owned or lived in the home prior to divorce is included.
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