Tax Issues for Couples in Divorce

A divorce is a difficult time, but ignoring the tax consequences can lead to complications later on. Knowing the central issues that will affect your finances after a divorce or while you are separated will help you to plan and handle your taxes and finances better. Even if you are living apart and not legally divorced yet, you will need to give thought to how you will be paying taxes differently now.

Tax Filing Status

When filing a tax return, you can only use the married filing jointly status if you were still living with your spouse on the last day of the tax year and were legally married. For example, if you are filing taxes for 2013 and you and your spouse began living apart from January, 2014, you can file married filing jointly for 2013.

It is advisable to use ‘single' or ‘head of household', and not married filing jointly, if:

  • You and your spouse began to live apart before the completion of a tax year
  • You have a legally binding separation agreement
  • You and your spouse have lived apart for at least the last six months of the tax year

Child Support Deductions

In most divorce cases, both the parents have specific responsibilities regarding the care their child(ren). Even if a parent does not have full custody, but pays medical expenses for the child, those expenses can be deducted.

Child support payments are not deductible. The parent who pays child support cannot make a deduction for child support payments. The recipient of child support does not need to pay taxes on the amount of child support received. Alimony, on the other hand, is taxable.

Alimony: Taxes and Deductions

Alimony is taxable for the person who receives it and is tax deductible for the person who pays it. If you are receiving alimony, the IRS will consider it income and will expect you to report the amount of alimony you received on your tax return and pay taxes on it. If you are paying alimony, you can claim it as a deduction.

Those receiving alimony will need to report it on Form 1040 Line 11 and those who are paying alimony will need to report it for deduction on Form 1040 Line 31.

It is particularly important for the recipient of the alimony to make sure that they report it on their return because the payer of the alimony will be reporting the alimony amount to the IRS to claim the deduction.

Division of Property

Division of property is an important part of a divorce and also has serious tax consequences. Any transfer of property that is included in a divorce decree will be subject to income taxes or gift taxes. If the requirements stated in Section 1041 of the Internal Revenue Code are met, the transfer of property will attract income taxes. If the requirements stated in Section 2516 are met, the transfer of property will be considered a gift and will attract gift taxes.

It is only the property acquired by the spouses during their marriage that is considered for division under a divorce. The court decides what would be the fair division of property for both the parties. The financial condition of either party may influence the judgment. Each spouse has specific rights to the property acquired during marriage, but they differ from state to state.

When getting a divorce, ensure that you protect not only your present rights, but also your future financial stability. The receiver of alimony and/or child support must prepare against the death, bankruptcy or unemployment of the giver of the alimony and/or child support. An alimony trust or a maintenance trust can help protect the receiver's financial stability in the future.

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