The Effect Of Divorce On Taxes
There is a general rule in the tax code that provides that transfers of property between spouses is not a taxable event, assuming that the transfer is made incident to the divorce. There are some exceptions to this general rule however. For example, if the transfer of property occurs more than six years after the marriage is terminated, there is a presumption that the transfer was not incident to the divorce. Similarly, if the transfer is not made in accordance with a written divorce agreement or property settlement agreement, there is a presumption that it was not related to the dissolution of the marriage.
With respect to alimony, the recipient of alimony payments must report funds as income. The payor receives a deduction for amounts paid in alimony. There are certain requirements to qualify payments as alimony. First, the payments must be made pursuant to an agreement or order. Second, the payments cannot be child support disguised as alimony. Third, the payments must be received by or on behalf of the former spouse. Fourth, the parties cannot file a joint tax return. Finally, the parties cannot be members of the same household. The tax code also provides ways in which excess transfers of property disguised as alimony are recaptured.
The parent that is entitled to claim a child as a dependent is the custodial parent or parent of primary residence. The parties can alter this rule by arrangement in their divorce agreement. Both parents cannot claim the same children as dependents in the same year.
Attorney's fees paid by a party to obtain spousal support are deductible. Similarly, payments made by one spouse to the other spouse for the purpose of paying the spouse's attorney's fees are also deductible. Be sure to save your invoices or any other evidence of payment in case of an audit.
A common area of misconception among divorce clients is tax refunds. Parties who file a joint return are not automatically entitled to half of a tax return. Instead what often happens is that each party is entitled to the portion of the refund based on determination of their respective incomes as if they had filed separate returns. Of course, this issue should be negotiated with both sides before the return is even filed.
There have been many cases where one spouse pressed criminal charges against another spouse for various tax issues, especially theft of the tax refund, forgery, etc. Discussing these issues ahead of time and signing a written agreement will help prevent this scenario.
This is just a short sample of many ways in which a divorce can have an effect on taxes.
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