Separation and divorce involves tax issues. Here is a summary of the notable issues that arise. Prior to engaging in negotiations for a separation agreement, you should review the tax implications with a Brunswick divorce lawyer and a certified public accountant. You should learn the actual, bottom line cost of the various choices, so that you know how much you are gaining or losing from the choices being negotiated.
Necessary IRS Forms
You need to give notice of the following:
1. Change of address. You need to mail a completed IRS Form 8822, Change of Address, to the Internal Revenue Center for your old address.
2. Change of name: You need to notify the Social Security Administration by submitting a completed Form SS-5, Application for a Social Security Card.
3. Change of withholding. You need to give your employer a new, completed, Form W-4, Employee’s Withholding Allowance Certificate, within ten days after the divorce or separation showing the new number of exemptions.
Changes in Filing Status
Your filing status changes with divorce:
1. Married filing jointly. You must be married for the entire tax year and file a joint tax return that you both sign. You are both jointly and individually liable for any tax, interest, and penalties due on a joint return, unless you can qualify for innocent spouse relief, separation of liability, or equitable relief.
2. Married filing separately. Always an option if you are married for the entire tax year. You are liable for the tax due on your own separate return, not your spouses. Usually results in a higher combined tax than married filing jointly.
3. Head of household. An advantageous tax filing status. Generally, you can file as head of household if you (a) file a separate return, (b) have primary physical custody of minor children, (c) have been separated from you spouse for at least six months of the tax year, and (d) claim the exemption for the child.
4. Individual. Once you are divorced you will file an individual return if you do not have primary physical custody of your minor children.
Negotiating point: a separation agreement can provide that neither party will seek a divorce for a period of time and that they will file a joint tax return. Such an arrangement can save taxes, usually for the noncustodial parent or the parent with the higher income.
Exemptions. Each deduction is $3,800. There are two types of deductions: personal and dependent.
1. Personal Deductions. You can claim yourself, unless someone else can claim you. You can claim your spouse if you (a) are filing a joint return, or (b) if you are filing a separate return and your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer. If you are divorce, you cannot claim your spouse even if you provided all of your former spouse’s support.
2. Dependent Deductions. Generally, the custodial parent can claim all children as deductions. The “custodial parent” is the parent the child lives with the greatest number of nights during the tax year. If the child spent an equal number of overnights with both parents, the parent with the highest adjusted gross income can take the deduction. The custodial parent can signs written declaration (IRS Form 8332) allowing noncustodial parent to claim child.
Negotiating point: the parties can agree that the noncustodial parent will claim the dependent deduction for some or all of the children, or that the deduction will alternate year by year. In negotiating this term, the parties must also consider the head of household filing status; agreeing to transfer the dependent deduction may also result in loss of head of household status. Further, an agreement for an equal division of custodial overnights can transfer the dependent deduction and the head of household status.
Alimony in Divorce Taxation
Alimony is deductible by the payer and must be included in the spouse’s or former spouse’s income. A payment is considered alimony if:
1. The payment is in cash or check;
2. The agreement or judgment does not designate the payment as not alimony;
3. If the spouses are divorce or living under a decree of separate maintenance, the spouse cannot be living together;
4. Payments will stop upon the death of the recipient spouse; and
5. The payments is not child support.
The parties can agree that the payments will not be treated as alimony.
Alimony can be “recaptured.” Recapture can occur if (a) the alimony you pay in the third year decreases by more than $15,000 from the second year, or (b) the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. If recapture occurs the paying spouses must include the income previously deducted and the receiving spouse can deduct the payments previously included in income.
You can deduct legal fees and the cost of appraisers, actuaries, and accountants for services in determining your correct tax and in helping to get or collect alimony.
Cash payments to a third party on behalf of the spouse under the terms of a divorce decree or agreement can be alimony if they otherwise qualify.
Tax Impact of Marital Property Settlements
Property settlements between spouses are generally not taxable events.
Negotiating point: many payments involved in the divorce can be designated alimony or not alimony. The tax savings or costs can be substantial.
In addition to the general principals outlined above, there are always exceptions and intricacies in the tax law. A family law specialist can tailor agreements for advantageous tax treatment. Be sure to consult with a Glynn County divorce lawyer or a CPA when making specific decisions.
The Law Office of Lee S. Ashmore
The Bank of America Building
777 Gloucester Street, Suite 402
Brunswick, GA 31520
P: (912) 275-7728
F: (912) 342-7142