After a divorce is finalized each party finds themselves dealing with new realities and obligations. Of all the financial ramifications of a divorce, determining the appropriate post-divorce tax filing status can be confusing. This post is not to be construed as tax advice and if you have tax-realted questions you are advised to contact the appropriate professional. One such professional is Noah Rosenfarb, CPA, PFS, CDFA of Freedom Divorce Advisors (www.freedomda.com). When negotiating a divorce settlement agreement a considerable amount of time is often spent determining who will claim the children as deductions on their respective taxes and whether one parent can qualify for "Head of Household" filing status. Noah has prepared the following summary to help explain what conditions must be met to qualify for head of household status and the benefits of doing so.
Filing as Head of Household (“HOH”) can save up to $8,000 per year over filing as Single. Therefore, it is critical to evaluate the post-divorce tax filing status for each party when negotiating a settlement. This requires thought and agreement beyond determining who will claim a child as a dependent. Most people are under a misconception that claiming a child as a dependent entitles them to file HOH. To qualify, you must satisfy all of the following requirements:
- You must be unmarried at the end of the year or live apart from your spouse for more than six months;
- You must maintain a household for your child (even if you do not claim them as a dependent), or a dependent parent, or other qualifying dependent relative;
- The household must be your home and generally must also be the main home of the qualifying dependent (i.e. they live there more than half the year);
- You must provide more than half the cost of maintaining the household; and
- You must be a U.S. citizen or resident alien for the entire tax year.
As indicated above, a taxpayer does not need to claim a dependency exemption to file HOH. So, for a custodial parent, even in years when you “give” (by completing IRS Form 8332) the dependency exemption to you ex-spouse, you can still file HOH.The key to ensuring HOH filing status generally lies in the custody arrangement. If an agreement provides joint custody, it may be helpful to indicate in the agreement which child lives with which parent for more than one half of the year. If there are two children, both parents can qualify as HOH, so long as one child lives with one parent more than half of the year, and the other child lives with the other parent more than half of the year. If audited, the parents will need to provide evidence that the dependent child spent more than 182 nights with the appropriate parent.Note that if one qualifies as HOH, they generally qualify to benefit from any related “dependent care credit” and/or “Earned Income Tax Credit” that may be applicable. The party taking the dependency exemption generally qualifies to benefit from the “child tax credit” and any extra stimulus rebates that may be provided in a given tax year.
The next time you discuss “who claims the kids” – expand your discussion to include the impact on filing status and the related tax credits to ensure your clients maximizes their tax benefits.
Be sure to discuss this important issue with both your divorce attorney and your accountant as you prepare your taxes. Thanks to Noah for this helpful information.
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