Divorce and Taxes

Divorce taxes your emotions, but if you plan carefully, you won't be surprised by the effect it has on your income taxes.

Filing Status

Your federal income tax filing status is determined by your marital status on the last day of the tax year:

• If you're still legally married, you can filed a "married filing jointly" return (the most advantageous filing status for most people)
• If you're legally divorced, you'll file as "single" or "head of household"
• You can file as "head of household" (a better filing status than "single") if:
  • You and your ex-spouse haven't lived together during the past six months
  • Your home was the main home for your qualifying dependents (usually your children)
  • You paid more than half the cost of keeping up your home for at least half the year
  • You can claim the exemption for your qualifying dependent

For some divorcing couples, it's advantageous to postpone the legal divorce until the following year in order to be able to claim "married filing jointly" tax status.

Exemptions for Children

The IRS presumes that the custodial parent is entitled to the exemption for children. The custodial parent may, however, "trade" the exemption to the noncustodial parent using IRS Form 8332.

The value of exemptions varies greatly depending on income, so it's a good idea to consult with an accountant to see which parent would benefit most from exemptions.

The custodial parent paying college expenses is entitled to the Hope Scholarship Credit and Lifetime Learning Credit for the child's college expenses.

Child Care Credit

Child care credits are available only to the custodial parent, and can't be "traded" to the other parent.

Child Support

Child support payments aren't tax deductible for the parent paying support or taxable income for the parent receiving support.

Alimony

Alimony payments are tax deductible for the ex-spouse making the payments and taxable for the ex-spouse receiving the payments.

The tax treatment of alimony payments makes it tempting for some divorcing spouses to try to disguise property settlement and child support as alimony. For that reason, the IRS has strict rules about what's considered alimony for tax purposes.

The IRS will consider money paid as alimony to be property settlement funds (and not deductible) if it's "front-loaded" (concentrated in too short a period of time directly after your divorce). The IRS is also always on the lookout for alimony that ends within six months of a child's 18th or 21st birthday, a tipoff that the alimony may in reality be disguised child support.

It's important to consult with an accountant before agreeing to alimony payments.

Property Transfers

There is no tax gain or loss in transferring property during a divorce. You may, however, end up having to file a gift tax return.

Recent changes in the capital gains laws make it unlikely you'll owe capital gains taxes as a result of title transfers of your home as part of your property settlement. If you have doubts, or want to sell your home right away, check with an accountant to learn exactly where you stand.

Pension Benefits

The tax status of pension and retirement benefits are governed by a Qualified Domestic Relations Order ("QDRO") filed as a part of your legal divorce proceedings. Benefits paid to a child under a QDRO are taxed to the plan participant. Benefits paid to an ex-spouse are taxed as the ex-spouse's income.

Liability for Taxes Owed

Under the IRS's "innocent spouse rule," you may not be responsible for your ex-spouse's failure to pay taxes due while you were married and filing joint returns if you can prove that you didn't know, and had no reason to know, your ex-spouse was misrepresenting information on your joint tax return. The IRS will consider your level of financial sophistication and the specific circumstances of the tax error.

Deducting the Cost of Divorce Tax Advice

While you can't deduct the cost of your divorce lawyer, you may be able to deduct the cost of tax advice given you by appraisers, actuaries and accountants.

Personal Tax Message Board for more help