We see a lot of divorce decrees in our office. When I say a lot, I mean, a lot. Invariably, we see a lot of financial mistakes in those decrees too. While every state is different, federal law reigns supreme. If this is your first tax season post-divorce, or if you are in the middle of your divorce proceedings, paying attention to these four most common mistakes will pay huge dividends later on.
Don’t forget IRS form 8332
IRS form 8332 (release/revocation of the release of claim to exemption for child by custodial parent) is a crucial form if you have dependent children eligible for child tax credits. If the non-custodial parent is going to claim the above-mentioned tax credits, the custodial parent, pursuant to your decree, must sign and release IRS form 8332 to the non-custodial parent. The non-custodial parent retains this form as proof they can claim the tax credits. For most couples, this form is signed every year. You can find it here: https://www.irs.gov/pub/irs-pdf/f8332.pdf
Don’t forget the Other Dependent Credit
The Tax Cuts & Jobs Act, which started in late 2017, but mainly applicable in 2018, has substantially changed the tax landscape. This is particularly true for divorcees and soon-to-be divorcees. Because of the broad changes to the tax code, many divorce decrees are incongruity to these new laws. The Other Dependent Credit is a $500 non-refundable tax credit for dependents older than 17 that do not qualify for the child tax credit. Generally, we see two situations:
Divorce decrees enforced prior to the law change generally do not address the Other Dependent Credit. Sometimes the language in the decree is written too specific to accommodate the old laws and states that the exchange of tax credits end when the youngest child turns 17. If this is your situation, you and your former spouse will need to either work together or modify your decree in accordance with the new laws.
Too many attorneys do not understand or are unaware of the new tax law. We are still seeing new decrees where the language does not jive with the new tax laws. Having a federally licensed Enrolled Agent or CDFA® on your divorce team, or as a financial neutral, can help you avoid these mistakes.
Don’t Forget Who Get’s to Claim the Child & Dependent Care Credit
If you are a working professional & have young children, it’s quite possible those children are in some form of daycare. As you may know, daycare can be extremely expensive! The IRS provides a tax credit where you can get 20% to 35% of up to $3,000 of child care & similar costs for a child under 13, an incapacitated spouse or parent, or another dependent so that you can work (and up to $6,000 for two or more dependents).
What happens in a divorce when both parents are sharing this cost? Can both parents claim this credit? Can it be rotated every other year?
The IRS is very specific that a qualifying person may only be claimed on one tax return. If a dependent is claimed on more than one tax return (for example, a child is claimed by both divorced parents) the IRS will apply a set of tiebreaker rules to see who gets to claim the dependent.
Alimony: Is it taxable?
Pursuant to the Tax Cuts & Jobs Act of 2017, alimony is no longer considered taxable income for any decree signed in force after midnight, December 31, 2018. If your divorce was finalized prior to this date, then you are subjected to the old laws & will continue to report alimony as usual.
But what happens if you are under temporary orders, receiving payments but in a lengthy divorce proceeding that hasn’t finished but started prior to the cut-off date mentioned above? What happens if you or your former spouse takes you back to court with the intent to modify your alimony payments?
The answer here is not so clear cut. To help in these more complex situations, the IRS clarified the definition of a divorce instrument to include:
A decree of divorce or separate maintenance or a written instrument incident to such a decree.
A written separation agreement.
A decree (not described in clause (i)) requiring a spouse to make payments for the support or maintenance of the other spouse.
Additionally, if you read the actual bill, there is a section that clarifies how divorcing couples can deal with these situations:
“any divorce or separation instrument (as so defined) executed on or before such date and modified after such date if the modification expressly provides that the amendments made by this section apply to such modification.” Source https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf
From a tax perspective, as we read the bill, we interpret this to mean that should a final decree signed prior to the law change be modified after December 31, 2018, the parties can choose whether or not be subjected to the old law or the new law. What’s the bottom line? Consult your attorney & a tax advisor if you’re in this situation.