The Certainties Of Life: Death, Taxes...and Divorce?

Although you may have heard the only two certainties of life are death and taxes, it seems like divorce is gaining on them. It is estimated that 50% of all marriages in America end in divorce. Although that figure sounds disheartening, the true percentage is somewhat less because of the number of people getting married four, five, or MORE times. For example, the famous actress Zsa Zsa Gabor got hitched nine times, and Larry King, the talk show “king”, just recently got out of marriage number eight!

But Zsa Zsa and Larry are not close to the World Record holders. Linda Wolfe of Indiana holds the record as the most married woman in history.  She’s said “I do” 23 times. And in 1996, as part of a publicity stunt, Linda married Glynn “Scotty” Wolfe in Arizona.  Scotty just happened to be the most married man in the world and Linda became wife number 29 for him.  At last count, that is (at least) 52 marriages between them!

Just as a marriage can complicate your tax return so can a divorce. If you are facing separation or recently got divorced, you should understand the tax implications of your situation.

There are several aspects of a divorce decree that can increase, lower or have no affect on your tax burden. The tax changes you face will be related to the details of your divorce decree. Obviously, it would be wise to completely understand this document and how it affects you. Professional legal counsel is highly advised in these situations.

Transfer of Property

When property is transferred between spouses in divorce there will generally be no income tax consequences, but this is not always the case. If property is transferred to a trust, third party or the property is used for a different purpose after the divorce, there could be tax implications. For example, if property is used for business purposes during marriage and then is only used for personal use after the divorce.

Alimony Payments and Receipts

Alimony is payments from one spouse to the other and is tax deductable by the payer. The recipient MUST claim it as income in the year received. Unlike some other deductions, the payer need not itemize on Schedule A to deduct alimony. Alimony is deducted “above the line” which simply means it is deducted before figuring Adjusted Gross Income. Unlike some other taxable income people receive (like wages from an employer), the IRS does not receive any estimated payments nor are taxes withheld from alimony payments, so the recipient may need to make quarterly estimated tax payments. 

Unlike interest or dividend income, alimony payments are considered earned income for the eligibility requirements for contributing to an IRA. 

The IRS has set up certain requirements that alimony MUST meet to be considered tax deductible to the payer. 

• Payment must be made in cash. (Can’t pay by mowing the lawn or painting the house)
• Must file separate returns
• Not part of same household
• No liability (to survivors) after the death of the recipient
• Payment cannot be considered child support or count as reduction in child support liability

Child Support

Child support isn't deductible by the payer, and it's not considered income to the recipient. Your decree should include a definitive ending period for child support not related to the age or any life changes of your children. 

Claiming of Exemptions

A special rule applies for determining who gets the exemption for a child in the case of a divorce or legal separation. If you're the custodial parent, you can claim the child as a dependent. However, the noncustodial parent can claim the Dependent Exemption and the Child Tax Credit, if applicable for the child if they have the consent of the custodial parent. The custodial parent can sign a release for the child for this purpose using IRS Form 8332.

The custodial parent may still qualify as Head of Household, and may be eligible for the Child Care Credit, Exclusion for Child Care Benefits and Earned Income Credit for that child. The noncustodial parent can't claim these benefits even though they can claim the exemption. It’s important for the divorce decree to clearly spell out the custody rights of each parent. 

Head of Household Status

There are several factors used to determine if you're eligible to file as Head of Household.

• You must be either unmarried (see below) or can be considered unmarried as defined by the IRS Tax Code on the last day of the year
• Have at least one qualifying child (See IRS Pub. 501 for the rules on of qualifying persons other than a child)
• Paid more than half the cost of upkeep of your home for the year

To be considered unmarried (in the eyes of the IRS):

• File a separate tax return from your spouse
• Lived separate from your spouse the last 6 months of the tax year
• Paid over half the cost of keeping up your home for the year
• Your home must have been the main home of your child for more than half the year
• You are able to claim an exemption for the child (An exception is if the noncustodial parent is claiming the exemption for the child because you signed Form 8332 you will still qualify)

Qualified Domestic Relations Orders

Retirement accounts are marital assets that will be divided according to your divorce decree. A separate agreement called a Qualified Domestic Relations Order (QDRO) is necessary for proper distribution of IRAs and/or any employer-provided retirement plans.

The QDRO is a decree, judgment or court order that relates to benefits paid to your child, spouse, former spouse or dependent. To be considered a QDRO, a document must meet specific requirements. Failure to meet these requirements can result in negative tax consequences.

Divorce can be a stressful and potentially expensive process. PRO-TAX can’t smooth over every area of a divorce, but we can help guide you through income tax and filing status changes. For more information about divorce and its impact on your income taxes, call PRO-TAX at 1-800-809-2829. You may also want to go to the IRS website and refer to IRS Publication 504-Divorce and Separated Individuals.

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