Tax Concerns Related to Divorce

The significance of the tax implications of a divorce can not be overstated. The valuation of any proposed settlement agreement must include a close inspection of the likely tax effects. An agreement's value to a client cannot be accurately measured without understanding the tax consequences any proposed agreement may produce. The type of alimony one agrees to pay, for example, can have a significant impact on whether or not alimony payments are tax deductible - which can drastically alter an agreement's worth. I always recommend that clients meet with a tax specialist during the representation. The Law Office of Jonathan T. Day, PLLC maintains relationships with tax professionals so that clients can have access to exactly the expertise that they need. With that in mind here are some general answers to some of the most frequent tax questions divorcing couples may have.

Should I file jointly or separately?
What was your marital status on the last day of the taxable year? If your divorce was final on or before December 31, you must each file separately as single or head of household for that year. If the divorce was not final by the end of the year you must file as a married couple for that year (either jointly or married filing separately).

Is alimony taxable?
Alimony payments are taxable, and therefore may be claimed as a tax deduction for the payor and as taxable income for the payee (the person receiving the alimony payments). However, not all forms of Mississippi alimony are tax deductible. In order for a payment to qualify as alimony under the Internal Revenue Code the payment obligation must terminate on the death of the payee. Of the four types of Mississippi alimony, only two meet the Internal Revenue Code's requirements - periodic alimony and rehabilitative alimony. Just because you are paying alimony in Mississippi does not mean that you automatically qualify for an alimony tax deduction.

Is child support taxable?
No. Child support is not taxable and cannot be claimed as taxable income nor as a tax deduction.

Who gets to claim the children on their taxes?
By default, the custodial parent (defined as the parent who has custody for the greater part of the year) is entitled to the dependency exemption. However, the custodial parent may waive the exemption by use of IRS Form 8332. Additionally, how tax credits and exemptions are to be divided can be determined by agreement, allowing for parents to split them evenly or for a non-custodial parent to claim credits or exemptions ordinarily reserved for the custodial parent.

How do divorcing couples divide assets for tax purposes?
After you divorce is final, asset division and corresponding tax liabilities will be laid out in your settlement agreement. If you are filing taxes in the middle of the divorce process, however, asset division and taxes can be rather complex - especially for high asset couples. Here are some things to think about:

• If you are selling your home, mortgage and property deductions are typically divided equally. However, you may want to speak with your accountant about cost-basis issues.
• If you are buying out the equity in your home, the spouse that has bought the home is usually entitled to any mortgage and property tax deductions.
• If you will be liquidating a 401k or an IRA, keep in mind that income gained from the liquidation of such accounts is taxed (except Roth accounts). A Qualified Domestic Relations Order (QDRO) will allow you to divide retirement accounts and potentially avoid taxes if transferred to a qualified retirement plan within certain time restrictions.
• If you are in the middle of a divorce and not sure what to do regarding property division, consider filing jointly or simply dividing deductions equally.

TIP: Take a look at IRS Publications 503 & 504.
IRS Publications 503 and 504 are references for separated and divorced couples. Publication 503 covers child and dependent care expenses. Publication 504 is a general reference for a broad number of divorce issues including alimony, filing status, exemptions, etc. The publications can easily be found by google search.

Of course this only scratches the surface of the tax implications a divorce may have, and how they may influence the value of a settlement agreement. These are simply some of the more common concerns. It is critical that you hire a divorce lawyer to help you negotiate for the best agreement possible, and speak with an accountant about all of the tax concerns surrounding your divorce.