Taxes and Divorce - Tax Issues During Divorce

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Taxes and Divorce

Tax consequences follow every decision made in a divorce, settlement agreement, or marital dispute resolution, often for many years. Whether there is a divorce, annulment, separate maintenance agreement, or dissolution, taxes need to be considered in making informed choices. Even when the choices are limited, knowledge of the tax problems created by the divorce may help achieve a better settlement.

What you need to know:

Introduction to Divorce and Taxes: 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.
Check the Calendar for Marriage Status: One of the most important tax decisions that every divorcing couple makes is filing joint or separate returns.
You May Be Able to File Separately on your Taxes: Sometimes, a married person files independent of his or her spouse and therefore files as "married filing separately."
The Marital Home in Taxes During Divorce: Sale of the marital home is often the only option if both parties are to receive an equitable share in the distribution of joint assets, but the sale of a house can expose the owners to taxes.
Who Claims the Children?: Generally, a person can claim the kids as dependents only if he or she is designated as the custodian by court order.
Alimony Looks Good on a Tax Return: Generally, spousal support - alimony - is treated by the IRS as income shifting.
Child Support Is Always Tax-Neutral: No matter how big the check - or how long a parent has to write it - the tax-neutral rules still apply.
Alimony vs. Child Support on Your Taxes: Alimony payors sometimes want as much support as possible to be in the form of alimony, and recipients want as much as possible to be in the form of child support.
It's Best for the Spouses to Make the Tax Decisions in Their Divorce: Many tax decisions a couple can best determine for themselves if they can act in good faith to one another, including the payment of any balance due on a joint income tax return and the distribution of any refund.

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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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