Article: Ten Points about Divorce from a Taxation Perspective
March 1, 2011
by Sean Wandrei, CPA , Published on 2/28/2011 in Business West
As much as divorce is an emotional event, it is also a financial one. Here are ten points you need to know about the tax implications of divorce.
- To be classified as alimony, payments must be substantially equal and for a period of at least 10 years. Alimony is taxable to the payee and deductible by the payer. Payments related to division of assets are not deductible by payer or taxable to payee.
- Child support is neither taxable to payee nor deductible by the payee or payer.
- Three provisions in the law may provide relief to ‘innocent spouses’ who were unaware of a tax understatement attributable to the other spouse or to divorcing couples who lived apart from each other for at least one year.
- An ex-spouse may be eligible for Social Security benefits if the marriage lasted at least 10 years. The beneficiary spouse must be 62 or older and unmarried in order to receive the benefits.
- Update estate documents and beneficiaries to ensure that the ex-spouse has been removed from these documents and accounts.
- Net operating losses (NOL) generated while married must be allocated to each spouse based on who generated the NOL. Carryovers specifically related to an asset, such as passive carry-forwards on rental property, follow the asset as allocated in the property division.
- If the married couple used the first-time Homebuyer Tax Credit, a divorce-related transfer of the home will not trigger the recapture rule of the credit.
- In situations where there are kids, the spouse who is entitled to the dependency exemption is able to deduct the exemption and take most tax credits related to that child.
- In the case of joint custody, if the parent pays more than half the cost of maintaining a household and the child lives with that parent for more than half the year, that parent can claim head-of-household filing status even if that parent does not claim the child as a dependent.
- Generally, legal fees relating to divorce are non-deductible unless they relate to tax advice or collection of taxable alimony.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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