If you are in the midst of a divorce, tax season can present unanticipated
issues. Despite the emotions involved in divorce, always approach tax
season in a logical and business-like manner to avoid unwise decisions
or errors in filing your taxes.
The following are answers to nine of the questions we hear most often from
our clients who are in the middle of this difficult transition.
If you are divorcing or contemplating a divorce, be sure to discuss tax
considerations with your attorney early on in the process. You may also
want to talk with an accountant or tax specialist. The IRS is also a great
resource and has many helpful publications are available for download at
The following information is current as of March 2014.
DOWNLOAD THE CHECKLIST:
Divorce & Taxes Checklist: 8 Important Tax Considerations for Divorcing Couples
1. For purposes of my filing, am I “married” or “single”?
Your tax filing status is determined on the last day of a tax year. Even
if you are living separately from your spouse, have reached a divorce
settlement, or have completed a dissolution trial, you are considered
married until a Decree of Dissolution is signed by the court. This means
that if no decree is entered by December 31 of the tax year, you are considered
married for tax purposes.
If you are married
If you are legally married for a given tax year, you and your spouse can
file a joint tax return (“Married filing jointly”) or you
can each file your own separate tax return (“Married filing separately”).
Joint Tax Return. Usually a joint tax return is more tax advantageous for both spouses.
However, be aware that you may have joint liabilities. Whether you or
your spouse prepares your return, be sure to review it and all supporting
documentation carefully. You may also want to hire an independent accountant
to review any return before you sign it.
Separate Tax Return. If you and your spouse choose to file separate tax returns, each of you
is responsible for your own return. Be aware that you will likely pay
a higher tax, due to your tax rate and limitations on the credits and
exemptions you can take. If your spouse itemizes deductions, you cannot
use the standard deduction and must itemize, as well. Finally, make every
effort to coordinate your return with your spouse’s to ensure that
income, deductions and credits are claimed and recognized correctly.
If you are single
If you are legally single by December 31, you must file a separate return
as a single tax payer for that tax year. This is true even if you were
married for the majority of the tax year.
2. Should I claim “Head of Household” for this tax filing?
Claiming Head of Household (“HOH”) status may lower your tax
obligation. If you and your spouse file separate returns, one of you can
claim HOH status, regardless of whether you are officially single or married.
If you are single, you qualify for HOH if (1) you paid more than half the cost of keeping
up a home in the tax year and (2) a child or other qualifying person lived
with you in the home for more than half the year.
If you are still considered married, you may qualify for HOH status if you meet the preceding criteria and
(a) you paid more than half the cost of keeping up your separate home
in the tax year; (b) your spouse did not live with you for the last six
months of the tax year; (c) your home was the main home of your child
for more than half the year; and (d) you can legally claim an exemption
for your child.
3. How should we handle claiming exemptions for our children?
If you have any dependent children, you may be entitled to claim an exemption
on your tax return, if the child lives with you most of the time. Additionally,
you and your spouse can agree to trade exemptions (and/or divide the exemptions
if you have more than one child) from year to year. If your income is
significantly higher than your spouse’s, you may find it more advantageous
to claim all exemptions. Be aware, that at high levels of income, the
exemption phases out, and the amount you can claim is reduced.
4. Which tax credits can I claim?
If you are the custodial parent of a child, you may be entitled to claim
certain tax credits. These credits are different from exemptions and cannot
be traded or divided by agreement.
Click here to see if you now qualify for the following tax credits.
Earned Income Credit
The earned income tax credit is intended to assist people with low-to-moderate
incomes. The earned income tax credit is one of the most heavily audited
tax credits, so it is a good idea to seek professional assistance if you
wish to claim this credit.
Do I qualify for the earned income credit?
Child Tax Credit
This credit may allow you to reduce the federal income tax you owe by up
to $1,000 for each child under the age of 17. This credit is phased out
at fairly low income levels. You may, however, be able to obtain a credit
even if you do not owe any taxes for a given year.
Do I qualify for the child tax credit?
Child Care Credit
If you are the parent of a child under the age of 13 and you paid someone
to care for your child while you were at work or looking for work, you
may be able to claim a credit on your tax return.
Do I qualify for the child care credit?
5. How do I handle spousal maintenance and child support payments on my
Maintenance vs. Child Support.
Regular cash payments you make to your spouse or former spouse under a
divorce or separation instrument (such as a Decree of Dissolution, separation
agreement, court order, etc.) are usually considered “spousal maintenance.”
Any maintenance you receive must be reported as income on your return.
Any maintenance you pay can be deducted on your return.
Child support, on the other hand, is neither taxable to the recipient nor
tax deductible for the payer.
Payments designated as not alimony
There is an exception to the standard tax treatment of alimony. From
IRS Pub. 17, note the following:
Payments designated as not alimony. You and your spouse can designate that otherwise qualifying payments are
not alimony. You do this by including a provision in your divorce or separation
instrument that states the payments are not deductible as alimony by you
and are excludable from your spouse’s income. For this purpose,
any instrument (written statement) signed by both of you that makes this
designation and that refers to a previous written separation agreement
is treated as a written separation agreement (and therefore a divorce
or separation instrument). If you are subject to temporary support orders,
the designation must be made in the original or a later temporary support order.
Your spouse can exclude the payments from income only if he or she attaches
a copy of the instrument designating them as not alimony to his or her
return. The copy must be attached each year the designation applies.”
Maintenance Recapture Rule.
If you pay spousal maintenance and the amount you pay decreases or terminates
during the first three calendar years (not including payments you made
under a temporary maintenance order), you may be subject to the maintenance
recapture rule. This rule requires that in your third year of regular
payments, you must include as income part of the maintenance payments
you previously deducted on your return (your spouse receiving maintenance
can make a corresponding deduction in the third year). The recapture rule
usually arises when you change your divorce/separation agreement or final
order with respect to the maintenance you pay. Recapture issues can also
come up if you fail to make your required maintenance payments or if you
reduce the maintenance you pay for some other reason.
6. How do I handle property settlement agreements?
Property and cash transfers between you and your spouse made as part of
a divorce agreement are generally tax neutral. This means that there is
no tax on cash transfers, there is no gain or loss on property transfers,
and the basis of a transferred asset will not change. If you receive property
that produces after divorce income (such as rental property, stocks, or
business interest), you are required to report income you receive from
that asset on your return. Special rules apply if you transfer more complex
assets, such as assets with unused passive activity loss, investment property
with recapture potential, stock options, and deferred compensation. If
you transfer these assets, you may end up with an adjusted basis, recognition
of income, or recapture issues.
7. How do I handle dividing the assets in our retirement plans and the
taxes associated with those plans?
Your individual retirement benefits can be divided as part of your final
divorce. In most cases you will pay no tax at the time of transfer.
- If you have a qualified retirement plan, such as a pension plan or 401(k)
account through your employer, your plan/account would be divided by a
qualified domestic relations order (“QDRO”). A QDRO is a court
order which instructs the plan to divide the benefit and ensure that the
recipient spouse will pay taxes on any distributions.
- If you have an Individual Retirement Plan (“IRA”), you can
divide it tax free in your divorce by using an IRA Transfer Order. After
transfer, the IRA is treated as the recipients’ own IRA account
with all the resultant tax benefits and consequences.
8. Can I claim a deduction for the costs involved in my divorce?
Unfortunately, you cannot deduct the legal fees and court costs you incur
in your divorce from your taxes. However, you may be able to deduct legal
fees and costs you pay in your effort to obtain spousal maintenance. You
may also be able to adjust the basis of real property by adding fees you
pay to prepare and file a deed of trust on that property as part of your
9. Can I put off dealing with tax issues until my divorce is final?
Tackling your tax issues “up front” in your divorce settlement
agreement or Decree of Dissolution will save significant frustration (and
legal fees) come tax time, especially if any of these issues arise several
years after your divorce is finalized. Make sure you address division
of future child tax credits and exemptions, recognition of current or
past income, division of refunds for past returns, liability for past
returns, and any tax consequences on the sale of the family home.
Please be advised that legal and/or tax issues can be very complex and
are different for everyone, based on unique circumstances. The information
provided here is informational only and should not be construed as personal
legal or tax advice. Consult an attorney or tax specialist for advice
on your situation.