With tax season just around the corner, now is a good time to discuss how divorce can change an individual's tax obligations. Arizona residents should understand how to factor those changes into their divorce negotiations. Many people overlook tax issues in the hectic months leading up to divorce, only to find that their tax scenarios could have been improved if taxation had been made part of conversations about their divorce settlements.
One of the most obvious changes is in relation to one's filing status. Most married couples file as married, but that designation will change to single once the divorce is made final. For those spouses who take on primary child custody responsibilities, it might also be possible to file as head of household, which can have a number of benefits. It should be noted that according to the IRS, individuals must file based on their marital status as of Dec. 31 of the tax year in question.
Another thing to consider is the tax benefits that come with raising one or more children. Many people assume that the party who takes on the bulk of custody obligations will also receive those tax benefits, but that is not necessarily the case. There are certain advantages, such as the Child and Dependent Care Credit, which can only be claimed by the custodial parent. Other benefits, such as deductions, the Child Tax Credit and credits for educational expenses can be claimed by either parent.
In structuring divorce negotiations, it is important to consider how these factors will impact one's tax landscape in the years to follow. In some cases, parents in Arizona are able to negotiate systems by which both parties benefit from the tax advantages afforded to parents. In order to create the best outcome for all involved, this is a discussion that should be had prior to signing a divorce settlement.
Source: fool.com, "Here's How Your Taxes Changed If You Just Got Divorced", Dan Caplinger, Feb. 11, 2016