Tax Issues to Consider During the Divorce Process

With the filing deadlines having just passed for the 2015 tax year, we have had many clients calling with various last minute tax issues. While the attorneys in this office are not accountants (and we always encourage our clients to consult with their accountants), we encourage our clients to consider the following tax issues during their divorce:

1. How should I file? Your filing status is determined by your status on December 31^st of the previous calendar year. Therefore, if you are divorced by December 31^st you are no longer eligible to file jointly and your filing status is single or, if you meet certain requirements, head of household. If you are considered married, your filing status is either married filing jointly or married filing separately.
2. Who claims the children as exemptions? Typically, the parent who has more than 50% of physical custody is entitled to claim the children for tax purposes. The parties can agree otherwise and the parent with primary physical custody can sign Form 8332 to release the exemption to the noncustodial parent.
3. How is child support treated for tax purposes? Child support is neither includible in the gross income of the recipient spouse nor deductible to the gross income of the payor spouse for tax purposes.
4. How is alimony treated for tax purposes?  Alimony is deductible from the gross income of the payor spouse and includible in the gross income of the recipient spouse for tax purposes. In order for payments to be considered alimony the payments must:
   1. Be paid pursuant to a divorce or separate maintenance order or agreement between the payor spouse and the recipient spouse;
   2. You and your spouse or former spouse do not file a joint tax return with each other;
   3. You pay in cash (including checks or money orders or electronic transfer);
   4. The payment is received by (or on behalf of) your spouse or former spouse;
   5. The divorce or separate maintenance order or agreement does not say the payment is notalimony;
   6. If you are legally separated under an order of divorce or separate maintenance agreement, you and your former spouse are not members of the same household when you make the payment;
   7. You have no liability to make the payment (in cash or property) after the death of your spouse or former spouse; and
   8. Your payment is not treated as child support or a property settlement.
5. Are transfers between spouses incident to a Property Settlement Agreement taxable events? In most cases, there is no taxable gain or loss on the transfers between spouses, or between former spouses, if the transfer is incident to divorce. A property transfer is incident to your divorce if it occurs within one (1) year after the date of your marriage or, is related to the ending of your marriage. A property transfer is related to the end of your marriage if the transfer is made under a divorce order or separation instrument and the transfer occurs within 6 years after your marriage ends.
6. Are attorneys’ fees and costs tax deductible? In most instances, the legal fees and court costs incurred to get a divorce are not tax deductible; however, you may be able to deduct some legal fees paid for tax advice in connection with a divorce and legal fees to get alimony. You may also be able to deduct fees you pay to appraisers, actuaries and/or accountants for services in determining your correct tax or in helping to get alimony.

It is important that you talk to an experienced family law attorney and your accountant about the particular circumstances of your case.

See IRS Topic 452, Publication 504 and Publication 529 for more Information.