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It is critical that your divorce lawyer knows how to address tax issues in your family law case.
Each year, while our clients are gathering the necessary information to prepare their tax returns, we are fielding common tax questions, such as:
“How should I file my taxes during separation?”
“How should we divide our tax refund?” or “Who should be responsible for the tax liability?”
“Who should claim the children as dependents?”
“Is my support taxable income?” or “Can I deduct support payments?”
Whether you are contemplating divorce or are separating from your spouse, some advance planning is required before filing your taxes.
Consideration should be given to the filing status of each spouse, to whether the spouses will itemize or use standard deductions, and to which spouse will be entitled to claim the various exemptions and deductions.
The Equitable Distribution factors require that the Federal, State and local tax implications be contemplated when dividing, distributing or assigning assets in divorce. Therefore, they should be considered when negotiating the terms of any divorce settlement.
Parents involved in custody matters should consider and negotiate the various exemptions and deductions that are available to them. Individuals paying or receiving any form of spousal support, alimony pendente lite or alimony must account for the tax implications.
How should I file my Taxes During Separation
Absent an agreement or Court Order to the contrary, we recommend that separated parties file their taxes for the most advantageous outcome – either to maximize the refund or limit the liability. Generally, filing a “Married, Filing Jointly” return will result in the best outcome for both parties; however, parties should consult and agree regarding how to divide any refund or liability prior to filing. Separated spouses will qualify to file “Married, Filing Jointly” if they were married as of December 31st of the tax year in question.
In some cases, the parties may choose to file as “Married, Filing Separately”; however, filing separately requires both spouses to forfeit a long list of possible credits and deductions, including the earned income credit and the deduction for student loan interest. While filing separately will ensure that you are not responsible for any tax consequences from your spouse’s income and/or debts, you are also more likely to have a higher tax bracket. For advice on your particular situation, we recommend that you speak with an accountant.
Separated spouses with children may also be able to file as “Head of Household”. In order to qualify, the following five conditions must be met: 1.) You must file as Head of Household; 2.) You paid more than half of the cost of keeping up your home last year; 3.) Your spouse didn’t live in your home for the last six months of the tax year; 4.) Your home was the main home of your child, stepchild or foster child for more than half the year; 5.) You must be able to claim an exemption for the child. As there are special requirements for what constitutes ‘costs of keeping up your home’ and what exemptions you can claim for your child, it is again recommended that you consult an accountant about your situation.
Who Gets the Tax Refund or who pays the Liability?
When filing jointly, we recommend speaking with your spouse and signing a written agreement prior to filing, regardless of whether you expect to receive a refund or anticipate owing the IRS. Failure to reach an agreement prior to filing frequently leads to situations where one party attempts to retain the entire refund or gets stuck paying the entire debt. While we can often seek a credit for these situations in equitable distribution, it is not always as “clean cut”.
Often, parties dispute how to split the tax refund. Spouses may agree to split the refund equally or proportionately to their respective incomes. When there is no agreement, the refund can be held in escrow, pending final resolution of the divorce.
For tax liabilities, the IRS generally holds each spouse responsible for the entire debt if you file “Married, Filing Jointly”. The IRS may excuse you from liability if you can prove that you are the innocent spouse, or otherwise not the cause of tax liability. There are other forms of relief, namely Separation of Liability Relief and Equitable Relief, that may also be available. .
Who Claims the Children?
Absent an agreement or Order of Court to the contrary, generally the parent with primary physical custody of the child(ren) is entitled to claim the children for tax purposes. However, in certain circumstances, consideration should be given to awarding the dependency exemption to the non-custodial parent if it would increase his or her net income and therefore the amount of his or her support obligation.
The dependency exemption should be addressed in situations where both parties share physical custody of children. Since a qualifying child may only be claimed by one parent, parties with multiple children may agree to allow each parent to claim at least one child, to effectively share the exemption. If the child(ren) spend an equal amount of time with both parents, then special tiebreaker rules from the IRS will apply and control who may take the exemption. Consulting an accountant as to qualifying child(ren) and the tiebreaker rules may be necessary for your situation.
Taxes and Spousal Support, Alimony Pendente Lite and Alimony
We previously addressed the differences between spousal support, alimony pendente lite and alimony in our blog. You must be concerned with the tax implications if you pay or receive any of these forms of support.
Spousal support, alimony pendente lite and alimony are treated as income to the recipient spouse and as a deduction for the paying spouse. An Order containing a child support award may have tax ramifications unless the Order states otherwise. However, an Order solely awarding child support is not considered as income for the recipient spouse or a deduction for the paying spouse.
Should I consult a Tax Professional?
We always recommend that clients consult a tax professional familiar with family law issues. IRS Rules and Regulations change frequently. While we can provide legal advice, your tax professional is best suited to help you determine the best possible way to file your taxes.