Tax Tips Details

Love Doesn't Conquer All: Some Tax Opportunities for Divorced Mothers and Fathers

Are you a parent recently divorced or planning to be by the end of the year? Don't let love matters interfere with your awareness of the tax consequences. Changes in your marital status in 2004 can have major effects on how you file your taxes, and the amount you will pay.

In 1999, the Child Tax Credit for each qualifying child was increased from $400 to $500. You may be able to claim a child tax credit if your child fulfills all of the following:

• Under age 17 at the end of 1999
• A citizen or resident of the U.S.
• Claimed as your dependent
• Is your son or daughter, stepson or stepdaughter, an adopted child, grandchild or an eligible foster child.

You will have to complete the Child Tax Credit Worksheet in the IRS Publication 972, Child Tax Credit, to claim this credit. You may also be able to take the Additional Child Tax Credit and save $1,500 or more on your taxes if you have three or more qualifying children.

The Child Tax Credit's availability depends to a great degree upon your tax filing status. If you file as a single, head of household or qualifying widow(er), the credit will be reduced if your modified adjusted gross income (MAGI) is more than $75,000. The credit is limited for marrieds filing jointly with a MAGI of $110,000, and for marrieds filing separately with a MAGI of $55,000. The child tax credit may also be limited if your tax liability is less than the value of the credit.

How does the IRS determine my filing status? For tax purposes, you are considered unmarried for the entire year if you are unmarried or legally separated from your spouse on the last day of the year according to the laws of your state. You must have obtained a final decree of divorce or separate maintenance by that date.

You can file returns as married filing jointly, married filing separately, single, or head of household status. You can change your filing status by filing an amended return using Form 1040X. If you are married and you or your spouse file separate returns, you can change to a joint return any time within 3 years from the due date of the separate returns. However, once you file a joint return, you cannot file separate returns for that year after the due date of the return.

Filing as head of household offers the following advantages:

• Your standard deduction is higher than that allowed for a single or married filing separate return.
• Your tax rate usually will be lower than a single or married filing separate return.
• You may be able to claim certain credits -- such as child care credit and earned income credit -- that you cannot claim on a married filing separate return.
• The limits for itemized deductions and the phase-out of deductions for personal exemptions begin at twice the income levels for heads of households than for single or married filing separate returns.

Requirements. You can file as head of household only if you were unmarried on the last day of the year. You must also have paid more than half the cost of keeping up a home that was your main residence for more than half of the year. The home must have been occupied by you, and any of the following qualifying persons for more than half the year:

• Unmarried children -- your child, grandchild, stepchild, foster child or adopted child. These children must be single to qualify. If married, you must be able to claim an exemption for them.
• Other relatives living with you and whom you can claim an exemption for. These can include parents, grandparents, brother, sister, uncle, aunt, nephew, niece, stepfamily members, half-siblings or in-laws. One exception: parents do not have to live with you, but you must pay more than half the cost of keeping your parent in a rest home or home for the elderly.

If you are divorced, you are still jointly and individually responsible for any tax, interest and penalties due on a joint return for a tax year ending before your divorce. This responsibility applies even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns.

You cannot deduct legal fees and court costs for getting a divorce. However, you may be able to deduct fees paid for tax advice in connection with a divorce and legal fees to get alimony. In addition, you may be able to deduct fees you pay to appraisers, actuaries, and accountants for services in determining your taxes or in help to get alimony. You should request itemized bills from your providers in order to identify deductible vs. non-deductible charges for each of these services.

You can claim deductible fees only if you itemize deductions on Schedule A (Form 1040). Claim them as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit.

You can determine whether you paid more than half of your home's costs with the Cost of Keeping Up a Home worksheet. This includes line items for property taxes, mortgage interest expense, rent, utility charges, upkeep and repairs, property insurance, and other household expenses. It also includes the cost of food consumed on the premises -- so keep those grocery bills and receipts. You cannot include the rental value of a home you own, or the value of services provided by you or a member of your household.