Tax implications grow with divorce

Well. it is that time of year--we all have to file our taxes. The following from the Oklahoman is helpful tax information for those of us who are divorced.The article also includes some rules relating to alimony (spousal support) and deductibility of tax advice for your divorce.

For starters, many people who receive alimony from their ex-spouses often have no idea -- until it's time to file their tax returns -- that they have to pay taxes on the alimony.

"It's the biggest pitfall in divorce cases," Oklahoma City tax attorney Ken Klingenberg said. Even if divorcees are told alimony is taxable, it often doesn't register, he said. "Maybe because of the emotional stress they're under, people ignore it," Klingenberg said. Consequently, they forget to set aside roughly 30 percent of their alimony for the taxes due.

In general, spousal support ordered under divorce decrees is taxable to receivers and tax-deductible for payers. The Social Security numbers of recipients must be included on payer's tax return.

Meanwhile, child support and property settlements carry no tax consequences.

Still, the widespread tax implications of divorce can be complicated. Issues range from what's the proper filing status to who gets to claim the children as a dependent.

Whether a divorce decree is signed July 15 or Dec. 31, taxpayers are considered divorced for that tax year, said David Stell, Oklahoma spokesman for the IRS.

If a divorce is pending, most experts recommend couples file joint returns if possible. That's because married taxpayers who file separately usually owe more tax, Stell said.

Separated spouses should be aware they can file as head of household, if they paid more than half the cost of keeping up a home for the entire year, their spouses didn't live in the house the last six months of the year and they have dependent children.

The election recently helped one of his clients go from owing taxes to having a refund, said Pete Terranova, Oklahoma City certified public accountant.

A head of household's standard deduction alone is $2,300 greater than for "married filing separately," he said. In addition, there are $4,400 in potential earned income tax credits, which aren't available to taxpayers who are married filing separately. The credit can erase taxes owed or give a refund.

In acrimonious marital situations, the IRS regularly sees parents attempt to claim the $3,200 exemption, $1,000 child tax credit and deductions for child care expenses for the same children, Stell said. Generally, the custodial parent, or parent with whom the child lives, receives the tax incentives, he said.

Divorce decrees can grant exemptions to noncustodial parents. But custodial parents must sign declarations that they won't claim the exemption, Stell said. The declaration -- IRS form 8332 -- must be attached to the return.

Ideally, the form -- which can be signed for a yearly or indefinite basis -- is completed when a divorce is finalized, Klingenberg said.

In joint custody cases, the question of which parent can claim the exemption comes to down to who has the child in their home the most number of days, he said. If time shares is the same, the parent with the higher adjusted gross income (AGI) can claim the incentives.

"There are a lot of issues that nonworking spouses should be on the lookout for," said Trish Goodman, an Edmond certified financial planner and one of a handful of certified divorce financial analysts in the state.

For example, there may be an advantage in receiving a share of an ex-spouse's retirement and/or pension assets versus accepting the equity in a home, Goodman said. Or a greater property settlement may be more advantageous than taxable alimony payments.

What at first seems fair, may not be, Goodman said. For example, homes, she said, come with tax implications -- from annual real estate taxes to capital gains taxes owed, if and when they're sold.

"My role is to quantify what each settlement option will look like and make 'what if' adjustments to help divorce attorneys reach an equitable division for their respective clients," Goodman said. "If I do my job right, the case should never have the expense of going to court over financial issues."

In general, women worry too much about keeping their "nests" for their children and not enough about their retirement, said Rebecca Hadler, a registered financial consultant with Access Financial Resources.

"They learn to manage through the alimony time frame," Hadler said, "but many are dangerously close to bankruptcy between the end of alimony and the time they can access retirement income."