Getting Divorced? Don't lose your shirt to the IRS while your Ex takes you to the Cleaner's
Getting Divorced? Don't lose your shirt to the IRS
while your ex takes you to the Cleaner's
If you get divorced, there are many thoughts that will be going through your head. What went wrong, how will you go on, etc. But there should also be some issues that you will discuss with your lawyer. These include custody, alimony, child support, and property settlement, including pensions and retirement benefits. The ones we can help you with are alimony, child support, and property settlement, specifically, we can help you with the tax consequences to you when you receive or give any of these items. With this knowledge, you will be able to negotiate intelligently and won't be caught off-guard when April 15th comes around.
First, you should realize that while the question of whether you will receive alimony or pay it is a matter for your family law lawyer to advise and advocate on your behalf. However, the tax law provides that alimony is deductible to the spouse who pays it and must be taxed as income to the spouse who receives it. Therefore, if you are asking for alimony, keep in mind that you will be paying taxes on the amount you get, and make sure you consider the net amount, after taxes. If you are the one paying alimony, at least be assured that Uncle Sam will be contributing to part of the payment through tax deductions.
Conversely, child support is not deductible to the parent who pays it. But it also isn't taxed to the parent who receives it. For that reason, ex-spouses would rather receive more child support and less alimony, and the other spouse wants to pay more alimony and less child support.
When people divorce, they often split up property. When property is divided pursuant to a divorce decree, the appreciation is not taxed until the property is sold by the recipient spouse. Spouses should therefore consider the after-tax value of the property. For example, a couple owns two pieces of investment real estate of equal value: one property was purchased thirty years ago and has appreciated significantly while the other was purchased recently and has actually depreciated or not appreciated much at all. The spouse who ends up with the older property will be paying a substantial tax bill when he sells it while the other spouse can keep all of the sales proceeds from hers, and may even get a deduction for capital loss.
One exception to this rule is the sale of the marital home. The tax code currently allows the cashing out of up to $250,000 of profit tax-free in a single taxpayer's principal residence. Married taxpayers get to shelter up to twice that amount, or $500,000. Therefore, if the marital home goes to one spouse, that spouse gets to shelter up to $250,000 of the profit when he eventually sells the home (the rule requires that he and/or his ex had owned and lived in the home for two of the previous five years when he sells it). If the recipient has remarried at the time of the sale and he and his new spouse both have owned and lived in the home for two of the preceding five years, then $500,000 of the profit escapes tax.
If there are minor children from the marriage, the general rule is that the custodial parent is the proper party to claim the tax exemption and the child tax credit for the children. The noncustodial parent cannot claim the children unless the other parent executes a document granting her the exemptions and the credit. The Child and Dependent Care Expense Credit, however, can only be claimed by the custodial parent, and cannot be assigned to the other parent.
In a divorce proceeding, pension and retirement benefits are often the largest assets may be subject to division. Often, a Qualified Domestic Relations Order (QDRO) must be entered by the Court to effect the division of these benefits. In the order, the method and timing of payment of benefits to the ex-spouse by the employee spouse's pension plan is outlined. Courts have held that pre-nuptial agreements purporting to waive one spouse's right to the other's retirement benefits are invalid because a person has to be already married to waive those rights. Therefore, if you want your spouse to waive her rights to your retirement benefits, you may need a post-nuptial agreement.
If your ex-spouse was always the one who took care of the taxes and tax returns, and you suddenly find yourself in trouble with the IRS over joint returns you signed and filed with your ex, you can ask for innocent spouse relief. This usually requires that you were ignorant of things that were reported (or not reported) on your joint returns.
And, finally, don't forget to change your Will, your general power of attorney, your medical power of attorney, and your insurance policies to reflect your new relationship with your ex. You probably don't want your ex to be the one who decides when to pull the plug when you're in the hospital.
©2002 Hum Law Firm, PLLC, 1700 Diagonal Road, Suite 610, Alexandria VA, 22314. For general information only. Please consult your tax advisor.