Texas residents going through a divorce might not think about the potential tax ramifications of dissolving a marriage. However, knowing what to expect means one will not be surprised and can prepare for the tax changes that occur after divorce.
The tax bracket one uses will change the year a divorce takes place. When a separation, annulment or divorce is finalized in a given year, the IRS considers an individual unmarried for that whole year. This means one should not file as "married filing separately" or "married filing jointly" for that year. An individual may file as "single" or as a "head of household" if one has children or other dependents.
Having minor children does not mean one automatically qualifies as a head of household. While other stipulations may also apply, only one parent can claim a child as a dependent. The custodial parent is the one who normally claims any children. However, the terms of a settlement might stipulate that the other parent can claim children instead. This means parents need to fill out Form 8332, and this should be included in the noncustodial parent's tax return.
The dependent exemption for children is typically a $4,050 deduction. This is a significant exemption, and it only increases if one has multiple children. Like with this exemption, only one person can claim things a couple previously put on joint returns. This may apply to a child tax credit, a mortgage interest deduction and more.
In some cases, parents might share custody of children. Figuring out the tax implications is one thing parents may sort out when making a settlement agreement. A couple could decide to switch off every year when claiming the kids on taxes, or one parent may get the right to claim children in exchange for something else. If parents can work together with the help of an attorney, there may be more room for negotiation and compromise.