“People who complain about taxes can be divided into two classes – men and women.” - Unknown
Is child support taxable or deductible? Do I file as Head of Household now that my spouse has moved out? I paid the mortgage on the house; do I get to take the mortgage interest deduction? Can we still file jointly this year, if we are separated? Tax questions are always part of the financial discussion of any divorce process. Information about tax consequences is usually needed to evaluate options, make decisions and reach a financial settlement. Although it’s not likely that you’ll make any decision solely based on the taxes involved, understanding the tax implications can be helpful.
The Collaborative process provides an opportunity for you both to use one financial neutral to answer your questions about income taxes. The financial neutral is a Certified Public Accountant (CPA) or a financial specialist with specialized training in divorce tax rules and regulations. The financial neutral can provide estimates of the tax consequences of the sale of the marital home, the sale of other assets, a change in income due to alimony, or a distribution of retirement assets. The tax impact is additional data used in the evaluation of options that could become part of your settlement agreement.
The questions that follow are a sample of frequently asked questions. The answers are based on IRS tax rules and regulations. You may consider this and other tax information in developing and evaluating options for a financial settlement that takes into account your unique situation and circumstances.
Can I file as Head of Household?
- You can file as head of household if you are unmarried or ‘considered unmarried’ on December 31st AND you paid more than ½ the cost of keeping up a home for the year AND a ‘qualifying person’ lived with you in the home for more than ½ the year.
- You are ‘considered unmarried’ if you file a separate return AND you paid more than ½ the cost of keeping up your home for the year AND your spouse did not live in the home during the last six months of the year AND your home was the main home of your child AND you can claim an exemption for the child.
- A ‘qualifying person’ is generally your unmarried child or grandchild who lives with you more than ½ the year. (Talk to an accountant or tax preparer if you have questions about whether your child or other relative is a qualifying person.)
- In the Collaborative process, since couples usually have a shared custody arrangement for their children, with two or more children, both mother and father can file as Head of Household by arranging their custody schedule appropriately to follow IRS requirements.
Who claims the dependency exemption for our child?
- Generally, the custodial parent claims the dependency exemption (however, see the next question below). By IRS regulations, if your child lives with you more than ½ of the year, then you are the custodial parent, and can claim the child as your dependent, if other age and relationship tests are satisfied. For information about other requirements (age, relationship, etc.), talk to your accountant, tax preparer or Collaborative financial neutral.
Can I ‘give’ the dependency exemption for our child to my spouse or former spouse?
- The custodial parent can give the non-custodial parent the ability to claim the dependent exemption for a child. In order to do this, the custodial parent signs a Form 8332 to release his or her claim to the child’s exemption. The non-custodial parent must then attach a copy of the signed Form 8332 to his or her return to claim the child as a dependent.
- In the Collaborative process, since parents usually have a shared custody arrangement for their children, with two or more children, the parents can evaluate the option of ‘giving’ the exemption to the non-custodial parent to achieve tax savings.
Is child support deductible?
- Child support is not taxable income to the parent who receives it. Child support is not tax deductible for the parent who pays it.
We are getting divorced this year. Can we still file as married filing jointly this year?
- You must be married on December 31st to file a tax return as married filing jointly.
I am ‘buying out’ my spouse’s ownership interest in the house. Will there be any tax due?
- Generally, there are no taxes due, when one spouse ‘buys out’ the other spouse for his or her ownership interest in the house. The IRS considers this transaction to be a transfer of property incident to a divorce and, therefore, no gain or loss is recognized on the transfer.
My husband made several payments to me before we had an interim agreement that specifies alimony payments. Can he deduct the payments made before the agreement was done?
- No, in order to deduct payments to a spouse as alimony the payments must be made under a written divorce or separation agreement.
Who claims the mortgage interest deduction?
- If you paid 100% of the mortgage payment (principal and interest) on a qualified home that is held in joint tenancy, then:
- deduct ½ of the payment as alimony paid and
- deduct ½ of the mortgage interest paid on Schedule A (Itemized Deductions).
- Your spouse must include ½ of the mortgage payment as alimony income, but can also then deduct ½ of the mortgage interest paid on Schedule A (Itemized Deductions).
- If you paid 100% of the mortgage payment (principal and interest) on a qualified home that is held as tenants by the entirety, then you can deduct all of the mortgage interest paid on Schedule A (Itemized Deductions).
(For questions about a qualified home, consult your accountant, tax preparer or Collaborative financial neutral.)
Who claims the real estate tax deduction?
- If you paid the real estate taxes and the home is held as tenants in common, then:
- deduct ½ of the real estate taxes paid as alimony paid and
- deduct the other ½ of the real estate taxes paid on Schedule A (Itemized Deductions).
- Your spouse must include ½ of the real estate taxes as alimony income, but then can deduct that same amount as a real estate tax deduction on Schedule A (Itemized Deductions).
- If you paid the real estate taxes and the home is held as tenants by the entirety or in joint tenancy, then you can deduct all of the real estate taxes on Schedule A (Itemized Deductions).
We paid estimated taxes to the IRS. Can we split these payments?
- If you and your spouse made joint estimated tax payments but file separate returns, either of you can claim all of the payments made, or you can divide them in any way that you both agree. It’s a good idea to attach an explanation of how you and your spouse divided the payments to each tax return.
- If you claim any of the payments on your tax return, enter your spouse’s or former spouse’s social security number in the space provided on the front of Form 1040 or Form 1040A.
Can I deduct the cost of the divorce?
- You cannot deduct all legal fees, but you may be able to deduct legal fees paid for tax advice in connection with a divorce. Tax advice is advice on federal, state, income, estate, gift, inheritance and property taxes. You may also be able to deduct legal fees paid to get or collect alimony. You should ask your attorney for a breakdown of fees paid that shows the amount charged for each service performed in order to document the legal fees paid for tax advice or paid to get alimony.
- You cannot deduct court costs.
- You may be able to deduct fees you paid to appraisers and accountants for tax advice, services related to determining your tax liability or help in getting alimony.
- You cannot deduct the costs of personal advice or counseling, even if they are paid, in part, to achieve a financial settlement.
- You cannot deduct fees you pay for your spouse, unless those payments qualify as alimony.
- You claim the deductible fees on Form 1040, Schedule A, as miscellaneous itemized deductions, subject to the 2%-of-adjusted-gross-income limit.
- You can add legal fees that you pay specifically for a property settlement to the basis of the property you receive.
The information above is of a general nature only; you should always check with your own accountant or tax preparer for tax advice related to your specific situation. In the Collaborative process, your financial neutral can answer your tax questions.
Resolving your financial issues may seem like a daunting task at first, but, with the help of the Collaborative team and the financial neutral, you and your spouse will reach a shared understanding of how to proceed, and be able to move forward with a sound financial plan for the future.
Cynthia Zagorski is a Certified Public Accountant, Certified Financial Planner ®, and Certified Divorce Financial Analyst TM who focuses her practice on the financial issues related to divorce and separation. She has substantial experience as a collaborative financial neutral. She also works with clients and their attorneys in negotiation, litigation and mediation.