Divorce and Taxes: 5 Tips to Consider Well Before April 15th
For most, filing your income taxes is stressful enough. When you add the stress of dealing with a divorce at the same time, trying to file taxes can be unbearable. However, if you consider the following five tips and discussion points that you should discuss with your attorney before the Federal Government’s April 15th deadline, you may be rewarded by maximizing your tax benefit while enjoying a more peaceful tax season.
1. Dates of Importance
Do you know what day your divorce decree was or will be entered? Document when your divorce was or will be finalized and document the date a divorce decree was granted. If a divorce decree was granted on any calendar day in the preceding year, you may not file a joint return with your former spouse. The IRS considers you unmarried for the entire year regardless of the date of your decree.
2. Marital Status
What marital status will you indicate on your tax returns? Your federal income tax return filing status is based upon your legal marital status, not your living situation. If you have filed for divorce, but it was not finalized or was still pending at the end of the year, then you have the option of filing separately or jointly. There may be advantages or disadvantage to filing each way. In making that decision, you will need to consider the implications of income reporting rules and discuss these options with an accountant. Additionally, your lawyer may need to assist you in reaching an agreement with your spouse regarding filing jointly or separately and how any tax liability or refund will be distributed.
3. File Together or Separately
Have you and your spouse agreed on how to file? If you and your spouse decide to file jointly, you will need to decide how you will divide any anticipated return, or who will be responsible for any outstanding liability. If you and your spouse decide to file separately, you will need to decide which party will claim your child or children on their tax return. Otherwise you may create easily avoided problems for yourself and run the risk of an Audit by the IRS.
4. Children and Tax Deductions
Who claims the kid? By default the party that has custody more than 50% of the time is entitled to claim the children. However, there are some exceptions to this rule, which should be discussed with counsel. The parties may agree or contract to grant the other parent the minor child exemption, according to what will benefit the entire family. If you have multiple children, those deductions may be split. Parties can agree to split or alternate the claim year to year.
5. Support May Be Income
Did you receive child support, spousal support or alimony? Child support is not considered income by the IRS; the party receiving it need not declare it as income and the party paying it may not deduct it from their income. Spousal Support, Alimony Pendente Lite (“APL”) and Alimony on the other hand are considered income. The party receiving spousal support or alimony must claim it as income and the party paying support may deduct the payment from his or her income tax return. Please note that there can be exceptions to this rule and this issue should be discussed with counsel.
The answers to each of these discussion points can have a significant impact on tax liability and support obligations. Additionally, these are just some simple examples; there are other issues that have can also have a significant tax impact. Consulting with your legal counsel and your accountant early in the new year will help you avoid potential pitfalls, maximize your tax benefit and hopefully reduce some of the stress that comes during the tax season.
Author: Hugh J. Algeo, IV