Special Tax Breaks for Single Parents
The tax code is complex, but it's not impossible to decipher, especially when you use a tax preparation software package like TurboTax (used by many financial professionals), or rely on a tax preparation professional. You should know that any alimony you receive is taxable. Child support payments you receive are not taxed, nor are they deductible for the person who pays them.
Alimony you receive won't have taxes withheld from the gross amount, so you usually need to have your employer increase your tax withholding or else pay quarterly or annual estimated tax payments to avoid a fine from the IRS at the end of the year.
You are required to pay estimated tax payments if the amount of taxes withheld for you during the year is less than either of these two amounts: 90 percent of the tax shown on your current year's tax return, or 100 percent of the tax shown on your prior year's tax return. You can calculate your estimated taxes for the year with IRS Form 1040-ES.
Although you cannot deduct the legal fees and court costs for actually obtaining a divorce, you may be able to deduct the cost of legal advice related to taxes or legal fees paid to negotiate alimony. You may also be able to deduct the cost of home appraisal, actuaries, and accountants whom you used to obtain income, such as through alimony, or tax advantages. IRS Publication 504, “Divorced or Separated Individuals,” provides guidelines.
You may be wondering whether you should itemize your expenses or take your standard deduction. In general, itemization will save you money if you have large medical and dental expenses, home mortgage interest, casualty and theft losses, job expenses, a small home-based business, or have made large charitable contributions during the year. The IRS publishes Form 1040, “Schedule A & B Instructions,” every year to clarify what payments can be included in your itemized deductions.
The tax code has two options for single parents that can lower the taxes you owe. You can file as “head of household” or as “qualifying widow with a dependent child.” Both options substantially raise the income bars that put you in higher income tax brackets. In 2006, single filers earning more than $30,651 typically fell in the 25 percent tax bracket. (You'll need to check this annually.)
When filing as “head of household,” a single mother has to earn $41,051, and a “qualifying widow with dependent child” has to earn $61,301, before getting higher “standard deductions.” In 2006, for example, single filers could claim a $5,150 standard deduction; “head of household” filers could claim $7,550; and “qualifying widow with dependent child” filers could claim $10,300.
To file as “head of household,” you must be “supporting” your child on your own, which means you are either unmarried or living apart from your spouse and filing separate tax returns. Child support payments are not considered taxable income; however, a single mother would have to pay more than half of the child's expenses during the year, including child support payments received, which most are.
To file as “head of household,” you and your children must meet the following requirements:
The child must be your biological, step, foster, or adopted child.
The child must live with you at least 50 percent of the year. (If she attends school away from home or travels for long periods, but you are still supporting her, she qualifies.)
The child cannot provide more than half of support (from trust funds, earned income, or inheritances). Check with the IRS if you are unsure about this provision.
The child must be under the age of 19, though there are exceptions: If she is a full-time student under the age of 24; if she is permanently and totally disabled; if she is not claiming herself on a separate tax return.
You must pay more than half of the cost of maintaining a home for yourself and your child for the year.
If your child doesn't meet all of the above requirements, but she does meet the requirements for the dependent exemption (see “The Dependent Exemption” later in this chapter), you may still be able to file as “head of household.” Consult with a tax advisor or review IRS Publication 501, “Exemptions, Standard Deduction and Filing Information.”
What is the Earned Income Tax Credit and how do I qualify?
The Earned Income Tax Credit (EITC) offers tax credit to financially challenged parents. If your earned income is less than $31,030 with one dependent child, and $35,263 with two children or more, you may qualify. A worksheet for figuring this credit is included in the book of instructions that accompanies the standard 1040 tax forms. The IRS will also calculate it for you, or you can consult with a tax advisor.
To file as a “qualifying widow with dependent child,” your spouse must have died within the past two years or within the past three years ended December 31 of the tax year for which you're filing. Your children must also meet the following requirements:
You can claim the dependent exemption for your child.
You were entitled to file a joint return with your spouse in the tax year that your spouse died (even if you didn't actually file a joint return that year).
You did not remarry before the end of that tax year.
You paid more than half of the cost for maintaining a home for yourself and your child for the entire tax year.
You can file a joint tax return in the year your spouse dies and then file as “qualifying widow” for the next two years.