Introduction to Divorce and Taxes

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Introduction to Divorce and Taxes

Information Provided by: Divorce Source, Inc.

Divorce, which is difficult mentally and emotionally, can be made worse by tax consequences, both foreseen and unforeseen. A divorcing couple, particularly a wealthy couple, should be aware of the tax ramifications of all transactions involving money or property. A prudent divorce attorney advises his or her client on any likely tax consequence from the distribution of property in a divorce.

 In general, two considerations are:

tax consequences, which include incomes and deductions of the spouses, number of dependents, credits, tax rates and the amount of tax paid to avoid penalties, and
legal liabilities, particularly those associated with a married couple filing jointly, which include joint and several liability.

Divorce, support, and property settlement involves money and property - sometimes a lot of money and a misstep in planning often work to the benefit of the tax collector. In general, the wealthier the couple are, the more tax questions and issues may come into play in a divorce, but even a merely prosperous middle-class couple who are divorcing should consider the tax implications and tax decisions.

Information Provided by: Divorce Source, Inc.

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INNOCENT SPOUSE RULE -- Section 434(c)(1) of the Internal Revenue Code protects an innocent spouse from tax fraud prosecution under certain conditions. This rule mainly protects women who innocently sign returns while married to men who controlled the finances. An innocent spouse can be protected from liability if 1) a joint return was filed, 2) the return contains a "grossly erroneous" error, 3) he or she establishes "lack of knowledge," and 4) it is "inequitable" to impose the tax on him or her. This rule does not protect the spouse from any legitimate tax obligations for which he or she is responsible under joint and several liability.

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