"Making It Make Sense" (SM) with Dr. Pamela Brewer
The Effect of Divorce on Your Income Tax Return
By Mark Morrison
It doesn't matter what the statistics on divorce are; if you're considering a divorce or have already filed, it's a highly charged emotional time for you, and it's probably unimportant to you what the divorce rate may be. Right now, yours is the only one you're thinking about.
With all the many details that must be tended to, it's easy to overlook some of them. If you're uncertain about how your divorce will be affected by taxes, this article will shed some light on the more common questions concerning divorce and the IRS.
The first thing to know is that you should contact a professional tax advisor as early in the divorce process as you can in order to keep the tax expenses of the divorce as low as possible. If your house or any other real estate property is transferred in the divorce settlement, it's not considered taxable by the IRS. Whoever winds up with the property could be taxed later if it's sold. If alimony is to be paid, the person paying it can deduct it from their taxes and the person receiving the alimony will have it taxes as income, unless it's specifically designated as child support for minor children. There are specific tax implications for the parent with custody of the children, including taking the dependency exemption.
Other taxes benefit the parent with whom the children reside for more than six months out of the year. That parent may be eligible for the head of household rate, the childcare credit, and the earned income credit. Whichever parent pays for medical expenses for the children can claim those expenses on their income tax return. Depending on the state you live in, the sale of your personal residence may not be taxed. Certain qualifications must be met, which emphasizes the need to contact professionals in each area in order to know which requirements are necessary in your particular situation. For the most part, the money spent on actually filing for divorce is not a deductible item, but some fees may be covered under the IRS category of miscellaneous itemized deductions. This can include fees you pay for getting tax advice with regard to the divorce. There are also tax considerations if you or your spouse has a retirement account, such as an IRA or other retirement plan. Again, your tax advisor will be able to walk you through the paperwork needed and give you guidance as to the best way to split the benefits so as not to suffer unexpected tax consequences.
The details of a divorce can quickly become quite complicated, in almost every area of the settlement. The need for the advice of professionals can't be emphasized strongly enough, even in the most amicable divorces.
This article has outlined some of the general areas of taxation that your divorce may impact. It should in no way be considered a substitute for professional advice, but merely a guide as to what you may expect. Financial advisors, accountants or tax preparers, and mortgage brokers are among the paid professionals that can help you avoid potential pitfalls in the divorce process.