Jul 24, 2008
Tax Implications of the Divorce
by Bi3ard / General
Although the decision to end a marriage is tough and painful, the tax consequences of that decision are often not considered and can be even bigger problem. The parties in divorce often make mistakes in this process, thinking that they are fixing one major mistake in their lives. These are some implications and pitfalls that should be avoided when it comes to tax.
Normally filing a "Married filing jointly" will result in the lowest taxes.
To be eligible to file under "Married filing jointly" status, you and your spouse must be legally still married (even if you are living apart) as of the last day of the tax year, December 31.
To qualify for "Married filing separately" status, you must still be legally married as of the last day of the tax year.
Finally, to file under "Single" status, you must be legally unmarried or legally separated as of December 31 and not eligible for Head of Household status.
Head of Household requirements:
- You were unmarried or considered unmarried on December 31.
- You paid more than half the cost of keeping up a home for the year.
- A child or other qualifying person lived with you in the home for more than half the year for which you or the other parent is entitled to claim the tax exemption.
You are considered unmarried if you were legally separated on December 31 or if your spouse did not live in your home for the last six months of the year.
Joint Return Liability
You may request relief from liability for tax, plus related penalties and interests for which you believe that your spouse (or former spouse) should be liable.
Innocent Spouse Relief is available if you:
- Filed a joint return
- Are no longer married to (or are legally separated from) the spouse with whom the joint return was filed.
Alimony/maintenance (not child support) is taxable to the recipient and deductible for the payer. Alimony is normally deductible to the spouse who pays the alimony and it is included in the income of the spouse receiving the alimony.
In some circumstances, however, a paying spouse may later be required to relinquish that deduction and include, as income, a portion of the alimony previously paid. This can occur when the IRS believes that spouses are attempting to disguise property settlements as alimony payments in order to receive a more favorable tax treatment.
Under the recapture rule, a spouse who pays alimony will be required to recapture any excess alimony paid during the first three years after the parties separate. The three-year time period begins in the first year that the spouse makes alimony payments to the other spouse.
It’s good to save the following from that three year period:
If you pay alimony:
- Original checks with the month the payment represents.
- A list that shows the date, check number, amount and address where payment was sent.
- If you give cash obtain and retain a receipt signed by both the payer and the recipient.
If you receive alimony:
- A photocopy of the check or money order received.
- A list that shows the date, check number, amount of payment, bank account the funds are drawn on, account number against which the check is drawn on.
- A copy signed receipt with signatures of both payer and recipient for any cash payment received.
Unlike Alimony, payments made as child support are not deductible by the person making the payments, nor are they income to the person who receives the money. That is the basic difference between alimony and child support.
Sometimes spouses are tempted to disguise the payments as alimony so that the payment is deductible. This attempt is often discovered when the IRS matches up the payer and payee tax returns and finds a discrepancy between the amounts reported.
Division of Property
Most transfers of property between spouses after July 18, 1984, may be tax free. According to the IRC 1041, the transfer is treated as a gift and the transferee spouse acquires the transferor spouse's basis.
However, the recipient of the property will be subject to a capital gains tax on the subsequent disposition of most property.
Also the sale or further transfer of the marital home requires special considerations.
The information provided in this article is for the informational purposes only.
Before acting upon or making any decisions based upon the information provided in this article, consult a good accountant experienced and familiar with tax law in matrimonial issues first.
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