When going through the divorce process, it is important to make sure you understand the tax consequences of any decisions you make. There are many important tax issues to consider such as:
- Who will get the tax exemption for dependents?
- Who will be able to claim Head Of Household status?
- Which attorney fees are tax deductible?
- How can you be sure spousal maintenance payments will be tax deductible?
Divorces and Tax Liability
Some of the most common tax issues facing couples going through a divorce might include the following:
Legal Fees
The legal fees for divorce are generally not deductible on your tax return as they are considered a personal expense. However, your legal fees for obtaining tax advice regarding alimony, property settlements, establishing an alimony trust, or the right to claim children as dependents can qualify as legal deductions on your tax return.
Alimony and Child Support
The ex-spouse who pays child support cannot deduct the amount paid and the ex-spouse who received child support does not have to pay taxes on the amount received. However, alimony is taxable as income to the recipient and tax-deductible to the ex-spouse paying support.
Tax Exemption for Dependents
Usually, the custodial parent claims the exemption for the child. But if the custodial parent’s income is high enough that they won’t benefit from claiming a personal exemption, the parents can agree to trade the exemption or to release it completely. To release the dependency exemption to the non-custodial parent, the custodial parent must sign a written statement that the custodial parent will not claim the child as a dependent for any tax year beginning in that calendar year. The non-custodial parent must attach that declaration to his or her tax return for the tax year beginning in that calendar year. The release must be made either on a completed Internal Revenue Service Form 8332, or on a statement conforming to the substance of Form 8332.
Head of Household Tax Status
You can claim the Head of Household filing status on your tax return if you meet the following criteria:
1. You are unmarried or considered unmarried on the last day of the year
2. You paid more than half the cost of keeping up a home for the year
3. A “qualifying person” lived with you in the home for more than half the year. If the “qualifying person” is your dependent parent, he or she does not have to live with you.
Married taxpayers who are separated or estranged from their spouse may be able to file as Head of Household, even though they are not legally separated or divorced if they meet certain criteria.
Property Settlement
The property you receive in a divorce settlement is not taxable income. However, if you decide to sell the property at a later date, there may be capital gains taxes to pay.
A married couple is considered divorced for the entire year in which they receive the final decree of divorce. If the divorce decree is finalized December 29, 2009, the couple cannot file as married for that calendar year. If the divorce is finalized in January 2010, they can be considered married for the entire year of 2010.
Almost any aspect of a divorce settlement can have tax implications. Therefore, it is important to consult with an experienced attorney who can help you understand how a recent divorce affect tax returns, and effectively guide you through this process.
