Divorce and Taxes Text Size:

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 file 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" or give 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 the exemptions.

Additionally, the custodial parent(s) paying college expenses is entitled to the Hope Scholarship Credit and Lifetime Learning Credit for their child's college expenses.

Child Care Credit

Unlike some exemptions, child care credits are available only to the custodial parent, and cannot be "traded" to the other parent.

Child Support

Child support payments are not tax deductible for the parent paying the support. Moreover, child support is not taxable income for the parent receiving the support.

Alimony

Unlike child support payments, alimony payments are tax deductible for the former spouse making the payments. However, the payments are taxable for the former 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 this reason, the IRS has strict rules about what's considered alimony for tax purposes.

If alimony appears to be "front-loaded," which means that there was a concentrated payment within a very short period of time after the divorce, the IRS may consider the money to be property settlement funds (which are not deductible). Additionally, if alimony ends within six months of a child's 18th or 21st birthday, this may trigger an investigation by the IRS to determine if the alimony is, in reality, disguised child support.

Therefore, 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.

Moreover, recent changes in the capital gains laws make it unlikely you'll owe capital gains taxes if you transferred the title 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

Married taxpayers are jointly and severally liable for tax, tax additions, interest, and penalties that may arise out of filing a joint return, even if they divorce later. Under the IRS "innocent spouse rule," you may not be responsible for your ex-spouse's failure to pay taxes that were due while you were married and filing joint returns if you can prove that:

• You filed a joint return and there was an understatement or misrepresentation of information that directly relates to your former spouse's items
• You didn't know at the time, and had no reason to know, of your former's spouse misrepresentations on your joint tax return
• Taking into consideration all the facts and circumstances, it would be unfair to hold you accountable

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 to you by appraisers, actuaries and accountants.

Questions For Your Attorney

• How do I insure that I meet the IRS rules regarding alimony?
• I just found out my former spouse lied on one of our joint tax returns. What information or evidence do I need to get to show that I qualify for "innocent spouse" relief and to ensure that I don't get in trouble with the IRS?

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