Your divorce will have an effect on many aspects of your life, including your tax liability. Even your marital status may be a tricky question on your first tax return following your divorce.
The IRS considers you married if you do not divorce by the last day of the tax year. So, if your divorce decree is dated December 31st, you were married - although you can still file as married filing separately. If your divorce final judgment is dated January 1st, you were single. Your separation does not alter your status.
Some of the decisions you make during your divorce negotiations could substantially affect your tax liability for many years. Consider the following facts before you finalize your divorce:
- Spousal maintenance, also known as "alimony," is income. The IRS counts spousal support as income to the person receiving the funds. This means that the payor is permitted to deduct spousal maintenance from taxable income, whereas the recipient is obligated to pay taxes on the spousal maintenance received.
- Child support is not income. Child support is intended to pay for the child's expenses. Therefore, neither parent can deduct or report these payments as income.
- Support payments apply to the child, then the spouse. The IRS applies partial support payments to the amount of child support due, with the remainder applied to spousal maintenance. The payor and recipient should adjust calculations accordingly.
- Only one parent can claim an exemption per year. The IRS only recognizes one exemption per dependent child each year. By default, the IRS accepts the exemption from the parent with primary custody. However parents may negotiate this benefit. For example, each parent can apply the exemption in alternating years. However, it should be noted that if the child is covered under the Affordable Care Act for medical insurance, the subsidies provided under that Federal law follow the exemption.
- Transfer of marital property is not a loss or a gain. Marital property belongs to both spouses. For this reason, the IRS does not count loss or gain arising from transfer of the property as incident to the divorce. There are exceptions to this rule when one spouse is not a U.S. citizen or certain terminable interests are involved.
- Some professional fees are deductible. Court costs, attorneys' fees and other divorce-related expenses are not deductible. But, payments made for accounting, appraisal and actuarial services retained for the purposes of spousal maintenance and tax determinations are deductible.
- Retirement and pensions - Special tax rules apply to qualified domestic relations orders (QDRO). Speak with your tax professional for more detailed information regarding the tax impact of your dissolution.
An experienced Minnesota divorce attorney takes tax issues into account when developing an effective settlement negotiation strategy.