Until my husband asked for a divorce a little more than a year ago, I hadn’t thought much about the impact of divorce on taxes. Now that I’ve been through a tax season with a brand new filing status, I’ve learned a few things about how your divorce can change your taxes.
Spousal Support is Income, Child Support is Not
One of the first things to realize about taxes and divorce is that spousal support should be reported as taxable income. If you receive it, it counts as income. If you pay it, you can deduct it from your income. My divorce decree doesn’t include spousal support, so it’s not an issue for me.
Child support is a different story. My ex pays child support, and he pays it happily. Because our country expects parents to financially support their children, child support isn’t considered income to the recipient, and the paying party can’t deduct it. However, it’s important that the money received in child support go toward the benefit of the child. I don’t spend the money sent for my son on anything other than taking care of him. My ex and I agreed that I’ll put half of what he sends in my son’s 529 account and use the other half to help with paying for his clothing and extracurricular activities.
New Filing Status = New Tax Bracket
In many cases, a new filing status can mean a new tax bracket. In my case, because I have custody of my son, I file as head of household. This means I don’t have quite the benefit I had when married, but my brackets are more favorable than someone filing single. My ex saw a jump into the next tax bracket because the gap in our incomes was closing just when he asked for a divorce. He found himself in the 25% bracket, instead of the 15% bracket, where we were as joint filers.
You also need to be clear on who is able to claim your children as dependents. Only one of you can claim your children. It should be spelled out in your divorce decree. Because my son lives with me 100% of the time, it was easy for us to agree that I would claim him. However, things might be different depending on how your custody works out. Someone who pays more in child support while having the kids 50% of the time might get the deduction. Or, if you have multiple children, you can each claim some. Others deduct in alternating years. However you do it, it’s important to be on the same page so that there aren’t mix ups at tax time.
SE Tax Increase
While my tax bracket didn’t change, my tax bill is going to be much bigger going forward. Because my business used to be run with my ex, we could assign income in a way that reduced my own FICA taxes. I had a lower self-employed tax. Now that I’ve had to dissolve my old business and start a new one, all of the income is assigned to me. That means my self-employment tax bill has gone up by quite a lot. So, even though I’m in a lower tax bracket than my ex, I will pay more in taxes going forward.
Carefully think about taxes and divorce, and consider consulting an expert if you aren’t sure how to proceed.