If you requested an extension from the IRS, your final deadline to file your 2020 taxes is now looming. Before filing, check your status from previous tax returns and consider the following circumstances that could make a significant difference in your tax burden or overall financial situation:
The child tax credit
The new child tax credit didn’t exist in 2020. If you haven’t yet filed your 2020 taxes, the federal government will automatically send the new credit to whoever claimed the child as a dependent in 2019. If custody status has changed since then, be sure to make that adjustment, so the appropriate parent gets the credit.
Claiming a child on alternating Years
If you and your former spouse have agreed to alternate who claims a child as a dependent, the parent who claimed the child the previous year will automatically get the benefit. Be sure to account for this modification.
Income and child support
Child support payments are calculated through tax-reported income. If you or your former spouse were laid off or received a drastic salary reduction in 2020 due to the COVID-19 recession or for any other reason, will significantly reduce the child support obligation.
Similarly, a parent who is a self-employed, high-income earner may have been able to write off a significant portion of employee salaries through the federal government’s payment protection program, making it appear as though their income was significantly less than it was, allowing them to pay less in child support. If you’re the custodial parent, you may want to consult an accountant regarding how to evaluate high-income earners during this unprecedented economic time.
Quick cash?
In the event of a divorce, consider long-term tax implications before selling a home or cashing out a retirement account. If a home is awarded to either spouse in the event of a divorce, neither party pays capital gains taxes. However, if the home is sold as part of the divorce, there will be a tax obligation that will need to be resolved if there are no other deductions or credits.
Seth Harris, a senior associate at the PMK family law division, is available to help you work through any issues related to divorce and child custody, as well as all family law needs. For more information, go to https://www.hawaiilegal.com/practice-areas/family-law-2/.
Note: The attorneys of PMK do not provide tax advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax advice. You should consult your tax advisors before engaging in any action.
