His friend Walt is an accountant and has been divorced for several years now and as they met for lunch, Steve asked Walt what he should know as he gets ready to file his income tax return. He learned some things from Walt that would help him with his deductions and credits that will make filing an accurate return easy and that will actually increase the size of his refund.
Determining tax filing status. One of the first questions a divorced dad has to answer is whether he can file as a head of household. The answer to this question depends on whether he is the custodial parent. If so, he can be a head of household. If his ex-wife is the custodial parent, she gets this filing status advantage. If you two have joint custody and share expenses and time on a 50/50 basis, neither can take the head of household status.
There is one exception, and that is that if the divorce agreement specifies that one child lives the majority of the time with the husband and another child lives most of the time with the wife, both may be able to file as a head of household. If you want to take this route, make sure that the arrangement is included with appropriate language in the divorce decree or settlement agreement.
Filing status is based on your status as of December 31 of the tax year in question. If your divorce was not final by the end of the year, you should consider a married filing jointly status for that year's taxes. Rates and tax policies are more favorable when you file in that status.
Claiming a child as a dependent. Whether a divorced dad can claim a child as a dependent is determined by the circumstances. If your ex has sole legal custody, then she is the one that can claim the child as a dependent. However, if you have joint custody and your child is with you 50% of the time, you may be able to claim the child as a dependent if you are the one paying child support or if you have the higher adjusted gross income.
It may be a good thing from a tax perspective for the parent with the higher income to claim the child, but if that child is getting ready for college and might get greater financial aid by being a dependent of the lower income parent, you might want to take that into account. You should also know that the parents can strike an agreement as to who claims the child as a dependent and the IRS will honor that. Check with your tax advisor as to the terms needed in the agreement and the proper IRS forms to file.
Deducting alimony and child support. The short answer to the question about deducting child support payments is "No, they are not deductible." Alimony is deductible, but it can't look like child support and still be deductible. The alimony has to be independent of child support, cannot be limited to a term that coincides with the children's age of majority, and cannot fluctuate with income. If deductibility is important, make sure that your attorney structures the divorce decree or settlement so that the alimony payments are not just disguised child support.
If you are still working on the terms of the divorce settlement, you may want to consider not making a property settlement payment (which is not taxable to the recipient nor deductible for the payer) and instead put the same dollars into alimony payments, which would be deductible for you.
Other deductions related to children. Some child care, health care and school expenses can be deducted, but only if you can claim the child as a dependent. You may also qualify for the tuition and fees deduction depending on your income and filing status or for the American Opportunity Tax Credit if you are paying college tuition and fees for your child. Amounts vary based on expenses and income status. But it is worth checking these out if your children are in college.
Deducting attorney's fees. Generally, attorney's fees related to a divorce are not tax deductible. However, some professional fees involved in preparing the settlement agreement may be. For example, fees you may pay for tax planning purposes related to the settlement may be deductible. If you had to pay fees to divide the assets in a qualified retirement plan, those may also be deductible. Generally, these kinds of fees fall into miscellaneous deductions and are deductible only when in total they exceed 2% of adjusted gross income.
Finding more information. The IRS has two very helpful publications. IRS Publication 504 Divorced or Separated Individuals and IRS Publication 503 Child and Dependent Care Exemptions are very important for any divorced father to read and understand prior to filing a tax return.