Divorce taxes your emotions, but if you plan carefully, you won't be surprised at tax time.
Your federal income tax filing status is set 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 must file as single or head of household
You get better tax benefits with head of household than with single filing status. You can file as head of household 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 or relatives
- You paid more than half the cost of keeping up your home for at least half the year
- You can claim the exemptions for your qualifying dependents
For some divorcing couples, it's better to postpone the legal divorce until the following year so they can use the married filing jointly filing tax status.
Exemptions for Children
The value of exemptions varies greatly depending on income, so it's a good idea to talk to an attorney or tax professional to see which parent would benefit most from the exemptions.
Child Care Credit
Unlike some exemptions, child care credits can be taken only by the custodial parent. They can't be "traded" to the other parent.
As general rules, child support payments are not:
- Tax deductible for the parent paying the support
- Taxable income for the parent receiving the support
Unlike child support payments, alimony payments are tax deductible for the ex-spouse making the payments. And the payments are 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 this reason, the IRS has strict rules about what's considered alimony for tax purposes.
If alimony appears to be front-loaded - meaning there's large 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). Also, if 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.
Before you agree to alimony payments, be sure to talk to your attorney or a tax professional about the tax consequences of the payments.
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.
Also, its crucial to look into the capital gains and losses you and your ex-spouse may have to report on your tax returns if, for example:
- Title to the marital home is transferred to one spouse in a property settlement
- You plan to sell the house and share the money from the sale
The tax status of pension and retirement benefits are controlled by a Qualified Domestic Relations Order (QDRO) filed as a part of your legal divorce proceedings. Generally, benefits paid to a child under a QDRO are taxed to the plan participant - the spouse with the benefits. 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 taxes, interest, and penalties on 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:
- 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
You can't deduct all fees charged by your divorce lawyer, but you may be able to deduct the cost of tax advice given to you by your lawyer when preparing for the divorce. You may also be able to deduct fees and expenses for appraisers, actuaries and accountants who performed work connected to the divorce.
Questions for Your Attorney
- How do I make sure I meet the IRS alimony rules?
- 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?
- Can we file a joint return if we live in separate homes but are still married?