TAX IMPLICATIONS

Divorce often presents tax issues and problems, including those relating to property and debt division, alimony, child support, and sometimes previously-filed (or yet to be filed) tax returns.

Because of the complexity and high stakes associated with divorce and taxes, this area is one in which you should try to keep the communication open and the emotions out.  Remember to approach your divorce like a business.  It will only benefit Uncle Sam if you file separate tax returns out of spite when filing jointly is beneficial.  Do not assume that you will be able to claim all deductions and exemptions.  That will only lead to fines, penalties and audits if you are wrong.  Make sure that all tax-related issues are settled and clearly stated in your Separation Agreement.

Several issues arise related to divorce and taxes:

1.  Filing Status:  How are you going to file your taxes?  Determine the most financially feasible way to file.  Typically, filing a Married Joint Return will result in the lowest taxes.  Hint:  Do not look at a joint return as any kind of “attachment” to your spouse; this decision is strictly financial.

2.  If you do sign a joint return, the law holds both you and your spouse responsible for the entire tax liability.  This is called joint and several liability.  Joint and several liability applies not only to the tax liability you show on the return but also to any additional tax liability the IRS determines to be due, even if the additional tax is due to income, deductions, or credits of your spouse or former spouse.  You remain jointly and severally liable for the taxes, and the IRS can still collect from you, even if you later divorce and the divorce decree states that your former spouse will be solely responsible for the tax obligation.

3.  If you have wrongfully been held responsible for your spouse’s obligation, you can claim that you are an “innocent spouse” and file the appropriate forms with the IRS. Here, you argue that you did not know, and had no reason to know, about any under-reporting of income or other wrongdoing associated with the filing of the return and therefore should not be held responsible for paying any additional taxes, penalties or interest due. 

4.  Exemptions:  You may claim a child that does not live with you only if it is stated in your Separation Agreement or if mutually agreed upon.  Allocation of the tax dependency exemption may be modified by the court upon the filing of a motion by either party.  If it can be shown that it would be in the best interest of the child for the non-residential parent to claim the child as a tax dependency exemption, the court can award the exemption to the non-residential parent.  Where there is more than one child of the marriage and one of the parties has a small amount of income, the tax dependency exemption and child tax credit may not be taken advantage of if that party claims all of the children.  At certain income levels, claiming more than one child may not increase the tax refund of the lesser earning parent, whereas the party with greater income could save thousands of dollars each year if the tax dependency exemptions are properly allocated.  For this reason, allocation of the tax dependency exemptions is a very important part of every divorce with minor children.

5.  Liabilities and Refunds:  Taxes owed, or refunds received, are usually treated as “marital” property and are, therefore, split equally among the parties.  In the heat of the moment, some spouses will intercept a tax refund and cash it without the other’s knowledge.  All funds must be accounted for and it is likely that if a spouse engages in this behavior their share of the final property settlement will be reduced.

Do you have questions about the tax consequences of divorce?  For effective legal counsel regarding divorce tax law, call (800) 910-DIVORCE or contact us.

If you either pay or receive alimony, there are tax ramifications.  Alimony is taxable to the recipient and deductible for the payer.  On the other hand, child support is neither taxable nor deductible.

Occasionally, a dispute will arise as to how much alimony was paid or received.  Sometimes the IRS will question the alimony amount.  For that reason, it is very important to keep thorough and accurate records:

1.  If you pay or receive alimony, keep photocopies of checks and show on each check the week or month the payment is for.

2.  If you pay or receive cash, make sure there is a receipt demonstrating each payment.

3.  Because child support, alimony and property division are often considered together in negotiating a divorce settlement, it can be tempting to manipulate the characterization of support or a given property transfer as alimony to a lower-income spouse in order to reduce tax liabilities for both spouses.  The IRS will often review the records and recapture these funds. 

When properly handled, the tax consequences of marital property division can increase the value of your final divorce settlement, providing each spouse with financial benefit.  A careful analysis of your specific situation can identify and address other matters such as capital gains on the liquidation of long-term investments, QDROs for the division of retirement accounts, and consequences of the sale of the marital home.

Many of our family law cases require technical or specialized knowledge that is often not directly related to the law itself, but nonetheless critical for purposes of advising clients, presenting evidence or assessing risk factors.  Attorney Irwin M. Pollack, The Massachusetts Family Law Group and the Massachusetts Flat-Fee Divorce Attorneys have established relationships with experts in various fields including estate planning, parental investigation, business valuation, real estate valuation and vocational skills.

We firmly believe that the interests of all parties in a divorce are usually best served by taking a collaborative approach, but in those situations when best efforts fail, our lawyers take an aggressive stance in advocating on behalf of our clients. 

Call (800) 910-DIVORCE or contact us for a no-obligation consultation on your contested divorce matter.  Learn More