As we reach the end of the year, it is time for everyone to start getting their tax affairs in order. Though federal income taxes are not due until April 15, those who have undergone a significant life change, such as a divorce, in 2014 may need time to understand how their tax bill has changed as a result.
Perhaps the most obvious way divorce can affect your tax bill is the fact that your household income usually drops significantly when the earnings of your spouse are no longer coming into your household. In addition, there are other ways that divorce can affect what you owe the IRS.
Depending on the terms of your divorce, you may have sole physical child custody of your kids. In that case, you can claim several tax breaks, including the dependency exemption for each child; in 2014, that exemption is worth $3,950. It is possible for the noncustodial parent to claim the tax break, with the custodial parent’s permission.
Other possible tax credits for people with custody of their children include the Child Care Credit, Exclusion for Child Care Benefits and the Earned Income Credit. For the non-custodial parent, the loss of these tax breaks could have significant consequences.
If one parent has sole custody, the other parent may have to pay child support. Child support has no tax implications. It is not deductible by the payer, nor is it taxable income for the recipient. However, spousal support, also known as alimony, is considered income by the IRS, and the paying former spouse can take the payments as a deduction.
These tax consequences should be part of the strategy when it comes time to negotiate a division of property.