With tax season right around the corner, many couples in the midst of a divorce will likely be confused about how to file their tax return. Although many splits are sadly not amicable, this is an important time to put aside your differences, sit down with your current or former spouse and cooperate.
These are the most common questions I receive each tax season along with the answers to help you during this time. Just as with every divorce, all tax returns are unique and you should consider consulting with a tax accountant.
Top 4 Tax Questions Divorcing Couples Ask:
1. Do we file jointly or as individuals? The law states that every individual must file according to his or her marital status as of December 31st in any given year. Some parties might consider delaying finality to their divorce until after the New Year so that they may reap the benefits of filing jointly. An agreement should be made in advance as to the refund, or deficiency in this case.
Alternatively, if you are still going through a divorce, you can file "married filing jointly" or "married filing separately." If there are concerns about income, such as a question about whether or not one party is reporting all income or withholding cash received in an effort to defraud the government, you may want to file separately or obtain indemnification from your spouse's representation.
2. Who claims the children? Unless there is an agreement or Court Order stating otherwise, the designated primary custodial parent has the right to claim the child, or children. If your divorce is still pending, it may make sense to include a provision that states if the person entitled to claim the exemption will not benefit from the deduction, the other person shall be entitled to make the claim. The most common settlement, as to this issue, is having the parties split the exemptions.
3. How do we divide our assets for tax purposes? For couples in the midst of a divorce, asset division can be complicated. However, for already divorced couples, this would be detailed in the divorce agreement. Reference your prior agreements or Court Orders as to how to split the deductions. Here are some examples:
• If one party is buying out the other's equity in the marital home, normally the person retaining the asset will be entitled to the deduction (such as a mortgage or property tax deduction).
• If property is being sold, the deduction can be divided (make sure to examine, with your accountant, any cost basis issues).
• If you are still in the process of getting divorced, deductions can be divided, or parties can file jointly.
• If one party will be liquidating an IRA or 401k, they will have to pay taxes on this income, unless of course the taxes were already paid as would be in the case for a Roth IRA or a Roth 401K. Keep in mind that dividing such an asset in divorce does not necessarily create any tax impact; it is the liquidation that creates the liability. If you utilize a Qualified Domestic Relations Order (QDRO) to divide a retirement account incident to a divorce, tax implications may be avoided unless liquidation ultimately occurs.
4. How do we file for different types of support? The three main types of support are alimony, child support and pendente lite support, which is often used to provide for the support of a lower income spouse while the legal process moves ahead.
• Alimony is normally taxable to the payee, the person receiving the payment, and deductible to the payor, the person paying the alimony. Parties can agree otherwise, which is common in military divorces where not all income is taxable. If the agreement states that alimony is not taxable, the agreement must be attached to the tax returns.
• Child support has no effect on taxes. In other words, if you are paying child support to your former spouse, you are not entitled to a deduction and the person receiving the child support will not claim the payment as income.
• Pendente lite support should be requested as unallocated and non-taxable if you are the receiving party. If it is not deemed as unallocated, this potentially could be a taxable event to the payee.
Tax laws change year after year, and this 2011 tax year is no different, so pay attention to changes that might affect your personal position. We offer further information on a particular tax change for this year that affects innocent spouse situations who need to file for tax relief in our website blog post entitled: IRS Amends Tax Law to Help 'Innocent Spouse' Relief.
Please keep in mind that when it comes to taxes, since every individual's income and assets are different, every situation is different. Again, consult an accountant whenever possible so as to ensure accuracy and comprehensive tax returns.
For more information about divorce or other family law related matters and receive access to download a free divorce guide you can contact us by visiting www.weinbergerlawgroup.com/Contact-Us.html.
To watch our free webinar entitled "The 5 Critical Risks of Divorce - and steps you can take to protect yourself and your family," please visit www.freedivorcewebinar.com. The webinar will be available for viewing at any time, after which, if you reside or were married in New Jersey, you will be able to arrange to speak with a divorce and family lawyer from the firm to address any questions or to get more information.
Bari Z. Weinberger, the founding partner of Weinberger Law Group, LLC, is an expert New Jersey Divorce and Family Law attorney. She is Certified by the Supreme Court of NJ as a Matrimonial Law Attorney, a certification achieved by only 2% of the attorneys in New Jersey. Ms. Weinberger is also the associate author of the New Jersey Family Law Practice, a 5-volume treatise utilized by virtually every family law judge and attorney in the State. Her practice is located in Morris County, NJ. Ms. Weinberger is a highly sought after attorney throughout the state as well as a legal expert for local and national media publications. For more information on Ms. Weinberger and Weinberger Law Group check out their website at http://www.weinbergerlawgroup.com/