Clients often ask us during this time of year whether they should file their taxes jointly, whether they can claim their kids as dependent exemptions, and other tax related questions. Carley Mealey, CPA, authored the article, Tax Tips for the Divorcing Couple.
Her article addresses such issues as:
- Filing status as Married Filing Joint, Married Filing Separate, and Head of Household
- Dependent exemptions
- Capital gains on property transferred incident to divorce; and
- Joint estimated tax payments
It is a very good starting place but even the author acknowledges that “these are just some of the tax issues that face divorcing couples.” Another resource is IRS Publication 504, Divorced or Separated Individuals, an excellent publication for help in preparing your return.
Alimony is tax deductible by the payor and taxable to the payee. 26 U.S.C. § 71 details the tax law concerning alimony. Gross income includes amounts received as alimony or separate maintenance payments. 26 U.S.C. § 215(a) allows an “above the line” deduction for alimony paid. In order for payments to truly be alimony for tax purposes, certain requirements must be met:
(1) Payment is received by a spouse under a divorce decree, court order, or separation agreement;
(2) The divorce decree, court order or separation agreement does not designate the payment as not being alimony;
(3) The spouses are not members of the same household when the payment(s) are made;
(4) Payments cease upon the recipient’s death.
If the payments fail to meet the above requirements, they are not alimony. If alimony payments decrease substantially or end during the first three years, special alimony recapture rules may apply which can have negative tax implications.
Child support & dependent exemptions
Child support is not tax deductibe and no tax is paid upon receipt of child support. Child dependent exemptions are also a consideration and there is new tax law on when the custodial parent can revoke the dependent exemption.
In general, the Internal Revenue Code allows a deduction for reasonable and necessary expenses incurred in the production of taxable income. This may entitle a client to a deduction of all, or a part of, the attorney fees paid to our Firm for the pursuit of post-separation support, alimony, and/or taxable pension payments. Check with your tax advisor or tax preparation professional so that he or she can assist you in determining your entitlement to this deduction.
Get professional advice
Even if you normally handle your own taxes, you should enlist the help of a CPA when you are going through a divorce. Many of our clients seek help from Steve Smith, a local CPA in Wilmington in preparing their taxes and Peter Starr, a Financial Advisor, in making decisions about their personal finances and money management. We strongly encourage you to work with a CPA and financial advisor of your choice. You may also require the services of a tax attorney in certain circumstances.
IRS CIRCULAR 230 DISCLOSURE: Rice Law, PLLC does not provide tax advice. Accordingly, pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained herein (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.