Getting divorced: status, the kids, the house, support

Your filing status for the whole year is decided by where things stand on the last day of it. Almost everything else about a divorce return follows from that one date.

Status turns on December 31

If a decree of divorce or separate maintenance is final by the last day of the year, you are treated as unmarried for the whole year. If it is not final by then, you are still married for tax purposes and the choice is between a joint return and separate returns, however many months you have lived apart. Being separated under an interlocutory decree, one entered but not yet final, still counts as married, and that is the case that catches people in the middle of a process.

There is a route out for a parent whose divorce has not finished. Someone who files a separate return, paid more than half the cost of keeping up the home, whose spouse did not live in that home during the last six months of the year, whose child lived there for more than half the year, and who can claim that child as a dependent may be considered unmarried and use head of household while still legally married. The dependency test carries its own carve-out: it is still met where the only reason you cannot claim the child is that the noncustodial parent may claim them under the rules for divorced or separated parents. Filing status has the tests in full. Being considered unmarried this way works for head of household and not automatically for other purposes, such as the earned income credit, which a separated spouse reaches through a test of its own set out in that article.

Head of household after a divorce

This is the status people assume they now have and often do not. It needs a qualifying person and more than half the cost of keeping up the home for the year, and where a child moves between two households the custodial-parent rules decide which parent can reach it at all. Two parents cannot both use the same child to get there. Filing status sets out the conditions, and claiming dependents sets out who counts as a qualifying person.

The children: what Form 8332 moves and what it does not

A custodial parent can release the claim to a child so that the noncustodial parent may claim that child as a dependent, and as a qualifying child for the child tax credit, the additional child tax credit or the credit for other dependents. Form 8332 is that release, and it can also be used to revoke one given earlier.

What it does not move is everything else. Head of household, the credit for child and dependent care expenses, the exclusion for dependent care benefits and the earned income credit stay with the custodial parent no matter who signed the release. A decree may allocate a child between two parents, but federal tax law decides who may claim a child on a federal return, and a decree does not by itself move that claim.

Support: alimony and child support

Under a divorce or separation instrument executed after December 31, 2018, alimony is neither deductible by the person paying it nor income to the person receiving it. Under an instrument executed on or before that date the older treatment still applies, so the payer deducts and the recipient reports. An older instrument modified afterwards keeps the older treatment unless the modification expressly states that the repeal of the deduction applies to it.

Child support is simpler and never changed: not deductible, and not income. Where a single instrument provides for both alimony and child support and the payer pays less than the total required, the payments are applied to child support first, and only what is left over is treated as alimony.

The house

Two rules here surprise people in opposite directions. A transfer of a home, or of a share in a jointly owned home, to a spouse or ex-spouse as part of a divorce settlement is generally treated as producing no gain or loss, with nothing to report from the transfer itself.

The second rule arrives later, when the house is sold. The main-home exclusion can keep up to $250,000 of gain out of income, or up to $500,000 on a joint return, but only where the ownership and use tests are met. Those tests measure who owned the home and who lived in it, and for how long, which is precisely what a divorce disturbs. Check them before a sale rather than after one.

Retirement accounts move differently

An account split between spouses moves under rules of its own. A distribution made to an alternate payee who is the spouse or former spouse of the participant, under a qualified domestic relations order, is one of the exceptions to the additional tax on an early distribution. That exception is the point to carry away here; the wider picture of early withdrawals is its own subject.

Fix withholding, and fix it in the same month

Hand in a new Form W-4 at every job for the status you will actually use, in the month things are signed rather than the following April. If support or investment income has changed sides, look at estimated payments as well, because money that arrives with nothing withheld is the usual reason a first post-divorce return produces a balance due. Quarterly estimates covers paying in during the year.