It’s tax season! If you are going through a divorce, make sure you know these seven tax matters.
With tax season in full swing, with the help of my associate Brianna D. Salerno, I thought it would be timely to discuss seven tax considerations for you to consider during your divorce. For tax year 2015, your federal tax return is due on April 18, 2016.
Filing Taxes Jointly or Separately
For federal tax purposes, your marital status as of December 31 of each year determines whether or not you file jointly or married-filing-separately. If your divorce is still pending at the end of the year, you can either file a joint return or choose the married-filing-separately status.
Additionally, if you are still married, but you and your spouse have not lived together at any time during the last six months of a tax year, then you may be able to file as head of household. One way to qualify for head of household is that (i) you will not be filing jointly with your spouse, (ii) your home was your child’s main home for more than half the year, and (iii) you meet the qualification too claim the child as your dependent, even if the noncustodial parent has the right to claim the dependency exemption for the child.
You may wish to file separately even if you are able to file jointly if you feel that your spouse may face a tax liability. To note, the IRS has an “Innocent Spouse Rule.” This Rule applies if the tax liability falls upon a specific taxpaying spouse. This Rule allows for the innocent spouse, which is the spouse who was unaware of the tax liability, to seek relief from not being responsible for the tax liability. In order to fall under the Rule, the innocent spouse must demonstrate that the parties filed a joint tax return for the year that has been underpaid, the innocent spouse was not aware of the liability, and it would be unfair to hold the innocent spouse liable after looking at all the facts and circumstances.
You should consult your accountant, Certified Public Accountant (CPA), tax attorney, or other tax preparer to determine what filing status based on your circumstances.
In a divorce, when property is transferred from one spouse to another there is usually no tax consequence for such a transfer. However, it is important to note that the party’s tax basis is transferred to the party who received the asset.
For example, if you receive an asset from your spouse in your divorce, and years later you sell the asset, you will pay capital gains tax on all the appreciation that accumulated before the transfer and after the transfer. This means you should consider the tax basis in addition to the value of the asset. In other words, assets that do not have a tax effect are worth more than assets that do have a tax effect. You should know the tax effect of all the assets that you and your spouse are splitting to ensure that you do not take all of the assets that do have a tax effect.
With regard to the marital home, your spouse and you need to decide who will keep the marital home, if the marital home is to be sold, and which person will benefit from the income tax or mortgage interest deduction and real estate taxes. There are many different ways for this to be agreed upon by parties.
Generally, the parent that provides more than half the support for a child claims the qualifying child as a dependent on the parent’s personal income tax return.
For 2015, the Internal Revenue Service (IRS) provides that for each dependent exemption a parent is permitted to reduce his or her taxable income by $4,000. For 2016, the dependency exemption is $4,050.
The IRS does allow for the noncustodial parent to claim a child on his or her personal income tax return if the custodial parent provides for such by completing a Form 8332. Form 8332 must be included in the noncustodial parent’s tax return each year he or she claims a child. This may be helpful in cases where the noncustodial parent is in a higher tax bracket. Parents may agree to alternate years for claiming a child or children, or if there are two or more children, parents may agree that one parent claims one child and other parent claims the other child.
Child Support Payments
Child support payments have no tax consequences for the payee or payer. The payer cannot deduct any payments for personal income tax returns. In turn, the payee does not have to include or account for the payments as part of his or hers personal income.
Spousal Support or Alimony Payments
Spousal support or alimony is deductible for the payer and taxable as income to the payee. Spousal support or alimony does not include:
- Child support;
- Non-cash property settlements;
- Payments to keep up the payer’s property; or
- Use of the payer’s property.
See IRS Publication 17 (2015). https://www.irs.gov/publications/p17/ch18.html#en_US_2015_publink1000172879
If you are seeking spousal support or alimony, you need to consider the resulting increased income tax liability. In turn, if you are going to pay support or alimony, you need to consider the tax deductions that may be available to you. Consult your accountant, CPA, tax attorney, or other tax preparer regarding this matter.
From Kiplinger, a party that must pay taxes on spousal support received may count the support as compensation for the purposes of making any Individual Retirement Account (IRA) contributions. If you are 49 or younger, for 2015 and 2016, you can contribute up to $5,500.00 in a traditional IRA, Roth IRA, or a combination of the two. If you are at least 50 years old, the contribution amount increases to $6,500.00 in 2015 and 2016.
For more information from Kiplinger about tax considerations, please check out this website: http://www.kiplinger.com/slideshow/taxes/T054-S001-most-overlooked-tax-breaks-for-the-newly-divorced/index.html
Per IRS Publication 529, https://www.irs.gov/pub/irs-pdf/p529.pdf, you can usually deduct attorneys’ fees that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax.
You may also deduct attorneys’ fees that are:
- Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business;
- Related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way; or
- To collect taxable alimony.
See IRS Publication 529 (2015).
You may be able to deduct tax advice that you obtain during your divorce on topics such as how to deduct the home mortgage interest or child care, or whether spousal support is tax deductible by the payer spouse or taxable income to the payee spouse as noted above. You may also deduct attorneys’ fees incurred in attempting to get the payer spouse to pay past-due spousal support.
You need to make sure that your attorney’s billing invoices allocate the fee between tax and non-tax services that the attorney has provided.
In addition to child support payments, you cannot deduct attorneys’ fees incurred to resist or reduce spousal support as these fees do not relate to the production or collection of income. Further, you cannot deduct personal attorneys’ fees for litigation as to custody and/or visitation of children, breach of promise to marry suit, civil or criminal charges arising from a personal relationship, and property claims or property settlement in a divorce.
One thing to note is that these attorneys’ fees fall under miscellaneous itemized deductions, and as a result, there are limitations that may reduce or may prevent a taxpayer from taking the tax deduction.
You should consult your accountant, Certified Public Accountant (CPA), tax attorney, or other tax preparer to determine whether or not you may deduct attorneys’ fees you have incurred for tax year 2015.
This article is not to be construed as tax advice. You should consult your accountant, Certified Public Accountant (CPA), tax attorney, or other tax preparer for specific instructions as to filing a federal and state tax return.