TAX TIPS FOR DIVORCE
Although taxes are probably not the first thing on your mind when going through a divorce, it is something that you should consider.?When you are married, your lives and your finances naturally intertwine.?Divorce is the process of untwining your lives, which inevitably has some tax consequences.?
Today, I want to give you some tax tips to help protect you in the event you do get divorced.?These are things like updating your W-4, knowing what to include on your tax return, and how to record marital/community assets so you don’t get audited by the IRS.?Remember, the more you know, the better you can be prepared.
Update Your Tax Withholdings
First and foremost, if you do end up going through a divorce, you need to talk to your employer and update your W-4.?Even if your income does not change, your filing status definitely will.?If you are in the middle of a divorce, you may want to file “married filing separately”, or if your divorce has been finalized, you will want to file either “single” or head of household” depending on your circumstances.?
Depending on your planned filing status, your income amount, and your household size you will want to adjust your withholdings on your W-4.?Simply go to your employer’s HR department and someone should be able to help you with your adjustments.?It may be helpful to visit these IRS websites to find your filing status, get some guidance on how to fill out your W-4, and determine how much you should withhold before seeing your HR department.
Child Dependency Rules
Something that I have seen repeatedly is when two former spouses both try to claim the same child on their tax returns.?Technically you aren’t supposed to negotiate which spouse can claim your child in a given tax year unless you have shared 50/50 custody.?If you don’t have 50/50 custody, the credits are supposed to go to the custodial parent. ?
This isn’t a huge deal because if the tax returns match up, the IRS won’t question it.?However, if the returns don’t match up, you will be receiving a CP 75 in the mail asking you to provide documentation proving you are the custodial parent.
You will need to prove that your child is related to you by blood or marriage, that they lived with you for more than half of the year, and that they did not provide more than half of their own support. This can get a little complex so it may be worth it to contact a tax professional if you are being audited for any of the familial relationship credits.
Alimony: Taxable and Deductible
Speaking of financial support, alimony is not as common as it used to be.?In fact, the percentage of cases that do award alimony, or spousal support, has dropped from 25 percent to about 10 percent in the last 60 years. ?For men, this is even lower, but it does still happen so you should be aware of how the tax code treats alimony.?
Alimony, or spousal support, is considered taxable income to the spouse who receives the support and deductible to the spouse who pays the support.?However, not everything you receive from a former spouse is alimony.?If the divorce decree provides for other types of payments, such as child support, those payments must be accounted for as well.
Something else that is important to note is if your ex-spouse does not pay the full amount as described in the divorce decree, the amount you receive is attributed to alimony last.?For example, what if the divorce decree states that $50K should be paid for alimony and $100K should be paid for child support but the spouse only paid $80K during the tax year? Well, you would report $80K received as child support and $0 received in alimony.?
Nontaxable Transactions
Why does this matter? Well, most of what you receive from your former spouse will be nontaxable income.?Payments from a former spouse that are not taxable are: ?
Although these payments are not considered taxable income, you should still report these to the IRS as non-taxable income to avoid being audited.?This can be a little tricky, so I would advise talking to a tax professional before filing a tax return for a year you received payments pursuant to a divorce decree.
Community Property
One last important piece of information I would like to provide is to make sure the IRS knows that you have partial ownership and how much ownership interest you own in the community property resulting from the divorce.?If the community property generates income (such as rental property, patents, or stock) you will be able to show exactly how much of the income generated belongs to you.?
If your former spouse tries to characterize that income as alimony so he or she can deduct it, you can show that it is not alimony, but income generated from community property.?This way you will not be double taxed on that income.?Also, if your former spouse decides to sell community property in the future, he or she will not be able to attribute all of that income to you and then simply run off with the money leaving you to pay taxes on the sale of that property.?
If this sounds oddly specific, it’s because these scenarios come from real cases I have worked on.?To protect yourself, simply report the award of community property ownership on a gift tax return.?Again, it might not be a bad idea to find a tax professional to help you with this.?
Getting divorced is never a pleasant experience.?However, if you take some steps to protect yourself, you can save yourself a lot of future pain and hassle.?Just remember, if you do find yourself in any of these situations, there is still help out there for you.?If you find yourself in trouble with the IRS, please feel free to set up a consultation with one of our experienced tax attorneys by following the link below.