After A Divorce, Who Gets To File As Head of Household For Their Taxes?

There are often issues with money and taxes when a couple separates, or even when an ex-divorcee gets married again but this is one of most common tax questions that we receive when a married couple with children are in the process of getting divorced.

With regards to divorces and taxes though, there are five different tax filing types:

Single

Married Filing Joint

Married Filing Separately

Head of Household

Qualifying widow(er) with dependent child

There are a number of advantages for the spouse that is able to use the Head of Household (“HOH”) filing status after the divorce is finalized. They include:

• Lower tax brackets

• A higher standard deduction

• The possibility of qualifying for more tax credits and deductions

Joint Custody

When parents are awarded joint custody, you would think that there is some flexibility as to who is allowed to file as HOH or at a minimum that the spouses can alternate who files as HOH each year. In a divorce, even with a joint custody arrangement, there is typically one custodial parent. The custodial parent is the parent that the children spend the greatest number of days during the year.In simple terms, it literally comes down to counting the number of days during the calendar year that the children spends with each parent. The parent that spends the most days with the children during the year is the custodial parent and has the right to file as Head of Household, to claim the children as a dependent, claim the child tax credits, and the dependent child care credit.

Form 8332

At any time after the divorce, the custodial parent has the ability to file Form 8332 with their tax return which allows the noncustodial parent to claim one or any number of the children as a dependent on their own tax return. However, even if the custodial party files Form 8332 with their return allowing their ex-spouse to claim one or more of the children as dependents for that tax year, they still retain the right to file under the Head of Household filing status. The Head of Household filing status cannot be transferred to the noncustodial parent via Form 8332.

Both Parents Claim HOH

There are a few rare cases where it could be possible for both parents to file as Head of Household in the same tax year. For example, if there are two children, one child spends 51% of the year with one parent, and the second child spends 51% of the year with the other parent, both parents may be able to file as Head of Household in the same tax year. If you feel like you and your ex-spouse qualify for this exception, you will need to keep very careful records of where the children spend their days and nights throughout the year.

You should keep a “child custody log” because there is a good chance that both parents filing as HOH post-divorce will trigger an audit by the IRS. But there is nothing guaranteeing that a child custody log by itself will satisfy the IRS in the event of an audit. The IRS could request additional information to determine that the 51% time requirement was met by each parent.

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The Procedures For Splitting Retirement Accounts In A Divorce

If you are going through a divorce and you or your spouse have retirement accounts, the processes for splitting the retirement accounts will vary depending on what type of retirement accounts are involved.

401(k) & 403(b) Plan

The first category of retirement plans are called ?employer sponsored qualified plans?. This category includes 401(k) plans, 403(b) plans, 457 plans, and profit sharing plans. Once you and your spouse have agreed upon the split amount of the retirement plans, one of the attorneys will draft Domestic Relations Order, otherwise known as a QDRO. This document provides instruction to the plans TPA (third party administrator) as to how and when to split the retirement assets between the ex-spouses. Here is the procedures from start to finish:

• One attorney drafts the Domestic Relations Order (?DRO?)

• The attorney for the other spouse reviews and approved the DRO

• The spouse covered by the retirement plan submits it to the TPA for review

• The TPA will review the document and respond with changes that need to be made (if any)

• Attorneys submit the DRO to the judge for signing

• Once the judge has signed the DRO, its now considered a Qualified Domestic Relations Order (QDRO)

• The spouse covered by the retirement plan submits the QDRO to the plans TPA for processing

• The TPA splits the retirement account and will often issues distribution forms to the ex-spouse not covered by the plan detailing the distribution options

Step number four is very important. Before the DRO is submitting to the judge for signing, make sure that the TPA, that oversees the plan being split, has had a chance to review the document. Each plan is different and some plans require unique language to be included in the DRO before the retirement account can be split. If the attorneys skip this step, we have seen cases where they go through the entire process, pay the court fees to have the judge sign the QDRO, they submit the QDRO for processing with the TPA, and then the TPA firm rejects the QDRO because it is missing information. The process has to start all over again, wasting time and money.

Pension Plans

Like employer sponsored retirement plans, pension plans are split through the drafting of a Qualified Domestic Relations Order (QDRO). However, unlike 401(k) and 403(b) plans that usually provide the ex-spouse with distribution options as soon as the QDRO is processed, with pension plans the benefit is typically delayed until the spouse covered by the plan is eligible to begin receiving pension payments. A word of caution, pension plans are tricky. There are a lot more issues to address in a QDRO document compared to a 401(k) plan. 401(k) plans are easy. With a 401(k) plan you have a current balance that can be split immediately. Pension plan are a promise to pay a future benefit and a lot can happen between now and the age that the covered spouse begins to collect pension payments. Pension plans can terminate, be frozen, employers can go bankrupt, or the spouse covered by the retirement plan can continue to work past the retirement date.

I would like to specifically address the final option in the paragraph above. In pension plans, typically the ex-spouse is not entitled to a benefit until the spouse covered by the pension plan is eligible to receive benefits. While the pension plan may state that the employee can retire at 65 and start collecting their pension, that does not mean that they will with 100% certainty. We have seen cases where the ex-husband could have retired at age 65 and started collecting his pension benefit but just to prevent his ex-wife from collecting on his benefit decided to delay retirement which in turn delayed the pension payments to his ex-wife. The ex-wife had included those pension payments in her retirement planning but had to keep working because the ex-husband delayed the benefit. Attorneys will often put language in a QDRO that state that whether the employee retires or not, at a given age, the ex-spouse is entitled to turn on her portion of the pension benefit. The attorneys have to work closely with the TPA of the pension plan to make sure the language in the QDRO is exactly what it need to be to reserve that benefit for the ex-spouse.

IRA (Individual Retirement Accounts)

IRA? are usually the easiest of the three categories to split because they do not require a Qualified Domestic Relations Order to separate the accounts. However, each IRA provider may have different documentation requirements to split the IRA accounts. The account owner should reach out to their investment advisor or the custodian of their IRA accounts to determine what documents are needed to split the account. Sometimes it is as easy as a letter of instruction signed by the owner of the IRA detailing the amount of the split and a copy of the signed divorce agreement. While these accounts are easier to split, make sure the procedures set forth by the IRA custodians are followed otherwise it could result in adverse tax consequences and/or early withdrawal penalties.

About Michael??...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.