Carol McAtee & Associatess, CPAs
Happy New Year!
With a new year beginning and tax season getting into full swing, we thought this topic was a timely one…
DIVORCE: Tax Issues to Consider
Here are six tax-related topics a couple considering divorce and their attorneys need to discuss, along with their tax professional…
- Child custody
As parents separating or considering divorce, child custody is definitely a tax concern that they must decide on–whether one parent will have primary custody or whether it will be shared relatively equally. That will affect which parent will get to claim the many child-related tax breaks such as the child tax credit, earned income tax credit, or the head of household filing status.Many divorcing parents elect to alternate the years in which they are able to claim the child/children as dependent/dependents on their income tax return. The non-custodial parent has additional filing requirements in the year in which they take the child/children as dependent/dependents.These issues should be discussed as part of the child support agreement. The IRS is not bound by state law on the definition of a custodial parent and has their own set of rules and requirements.
- Alimony and child support
Alimony generally counts as taxable income to the person receiving it. It also can be deducted by the person paying it. Child support, however, is not taxable, either to the spouse receiving it or the children for whom it is supposed to be spent. And child support payments can’t be deducted by the paying parent.
- Timing and its effect on filing status
The Internal Revenue Code deems you married or not based on your legal circumstances on the final day of the tax year.So, a breakup that drags on could mean you’ll end a year still married in the Internal Revenue Service’s eyes even though you’re trying to become single again. It might suit some couples to file separate 1040s as married filing separately. Or, even thought things are rocky, a joint return could be better for both soon to be ex-spouses.Again, look at your situation and talk with your professional advisers as to how your two filing options affect your income, exemptions, credits and deductions. And couples in community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — take extra care.
- When to sell the house
A married couple gets to exclude up to $500,000 in home sale profit from taxable income. A single homeowner only gets half that tax-sheltered savings. So if there’s a likelihood that neither spouse wants to keep the house long-term, look into selling it before the split or making compensatory arrangements for the spouse who’ll keep it and get the smaller tax break when finally selling.
- All the assets and their tax costs Many divorces are nasty. Sometimes one partner, particularly the one who’s been contemplating divorce longer, tries to hide income and assets before the process of breaking up begins. In these cases you — more appropriately, your lawyer and forensic accountant — might need to play detective and use tax returns to uncover hidden divorce assets.Even when the property to be divided is clear, you need to carefully weigh the tax implications. Take, for example, a couple that has a tax-deferred retirement account and a regular investment account, both worth $100,000 each. Spouse A gets the retirement money; Spouse B keeps the regular account.When A starts taking money from the retirement account, taxes will be due at ordinary tax rates on the earnings that have been accruing tax-deferred for years. B, however, will be able to pay generally lower long-term capital gains tax on that account’s withdrawals. So pay close attention to assets’ eventual tax costs when deciding who gets what.
- Don’t forget state taxes
There are 50 states, plus the District of Columbia, and those jurisdictions will have final say over the end of a marriage. They also could have some tax matters that a divorcing couples needs to consider. Make sure your attorney is aware of your state’s tax laws and how they could affect your divorce decisions.
Taxes will be even more stressful when they’re tied to a divorce, but they need to be part of the discussions during the split so that both partners can go their own ways without also worrying about the IRS.
If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER, OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.