California Divorce and Family Law

Five Ways to Save Tax Money During a Divorce

Taxes are probably the last thing on the mind of someone going through a divorce. But maybe they shouldn't be. Here are some money-saving tax tips to consider if you're getting divorced

The first thing certified divorce practitioner Clay Caldwell tells his clients is to “reach agreements with each other.” It’s very important, he said, to talk with your spouse and straighten out money issues. It’s very easy to lose money if the separating couple isn't communicating.

Decide the best way to file your taxes

There are three options when filing for taxes. Filing as "Head of Household" saves you the most money and varies with income. In order to qualify under this label, you must pay more than half the cost of keeping up the home and a qualified person, such as a child, must be living with you.

The second option is to file jointly. If you have not filed for divorce before Dec. 31, filing jointly is more beneficial to you and your spouse, according to experts. Joint filing means you are both responsible for all taxes and are each entitled to a prorated share of any refunds. It also puts you in a better tax bracket. If there are additional taxes or penalties because of fraud or negligence on past returns, you could qualify as an "innocent spouse," according to Caldwell. 

Filing separately is the last way to file. This option usually means paying the most taxes. The good news, however, is that you are only responsible for your own taxes. 

Choose who will claim the children

Deciding who will claim the children depends on many things. Couples should figure out who has the higher income and who sits in the better tax bracket. The parent who establishes custody gets a dependency exemption, which could come to about $3,000 per child.

Child support is not tax deductible because it's considered something you'd pay whether or not you are divorced. However, alimony or “maintenance” is tax deductible.

Preserve assets 

State tax laws differ on divorce. Some states, such as Texas and California,are known as common law or community property states. These states treat all property owned by a married couple as a shared asset. “When you file for divorce everything is subject to division,” said Ken Raggio, a Dallas-based divorce lawyer.

California,for instance, splits community property 50/50.

Property transferred between spouses isn't subject to taxes. But selling stocks, homes and vacation homes as part of a divorce are taxed. A jointly-owned residence that one spouse has been granted the use of is tax deductible contingent upon agreements between the couple and IRS regulations. "If the non-residential spouse has agreed to pay the expenses, half the mortgage payment may be deducted as alimony, and the other half deductible as interest expenses,” said Caldwell.

Follow up on beneficiary forms after the divorce

The last tip, and perhaps the most complex divorce tax issue is retirement. “Retirement rules are so complicated, without a lawyer people can lose a lot of money,” said Lee Rosen, a North Carolina tax divorce lawyer.

All retirement benefits including qualified and unqualified plans, vested or unvested stock options, restricted stock or any other form of deferred compensation are divisible in a divorce. The transfer of retirement benefits is not taxable. Retirement benefits from an ex-spouse are taxable as ordinary income when withdrawn. You will also be taxed if you use the retirement benefits before age 59½ or don’t roll them over the right way.

When it comes to taxes in divorce, people are getting a lot smarter because they don’t want to lose money, experts said. “Time is money in divorce law,” said Caldwell. It's very unlikely you will figure out all the tax issues alone with your spouse. Keeping that in mind, any professional tax advice prior to your divorce is tax deductible, so it may be worth it to get some financial guidance.

From Fox Business. 

Tax form can help in divorce

Question: I have been divorced for a few years. The divorce decree says I get to claim my daughter as a dependent and my ex is supposed to claim my son. The problem is that my ex beats me to the tax man every year and claims both children. What can I do to stop this?

Answer: You've learned that a divorce decree is typically binding only on the parties that agree to it -- and the Internal Revenue Service wasn't one of those parties.

The best way to protect your right to claim your daughter as a dependent is to have your ex-husband sign IRS Form 8332 waiving his right to claim her -- and you'll need to fill one out releasing your claim to your son. You need to fill out a separate form for each child.

Ideally, this would have been handled as part of your divorce.

"It really surprises me that divorce attorneys don't automatically include Form 8332 as one of the documents to be signed whenever child support comes into play," Rosenberg said.

If you can't get your ex-husband to cooperate, you're not out of options. If your daughter lived with you for more than half the year and you provided more than half her support for the year, and can prove both facts, Rosenberg recommends you "go ahead and file your tax return on paper, the old-fashioned way."

The IRS will challenge you, but if you can defend your position, you can prevail.

On the other hand, if you only provided support but your daughter did not sleep under your roof for at least 183 days (or otherwise met the "living with you" standard outlined in IRS Publication 501), you will lose the exemption.

"This is where getting that Form 8332 signed at the time of the divorce is so critical," Rosenberg said. "Without it, in a dispute, you lose. Sorry."

From the LA Times.

Marital status at the end of the year determines filing status

Q: My divorce was final in December 2007. How should I file my taxes? Can I file as single now or do my ex and I have to do one last joint return since we were married for the majority of 2007?

Answer from AICPA member Lisa R. Featherngill: Your filing status is determined on the last day of the year.

Thus, you can file single for 2007. If you have children, one of you may consider filing head-of-household to lower your tax rate.

For more information:     What is your Filing status? 

From USA Today.

Tax issues in divorce and separation

In the event of a divorce, the court has the authority to divide or allocate all the property and assets belonging to both parties. This includes pension plans, IRAs, and other retirement assets.

Pension plans, profit-sharing plans, 401(k) plans, 403(b) plans and other "qualified plans" are all subject to an "anti-alienation provision" under federal law that provides that the plans can not be assigned or subject to any type of attachment, garnishment or levy. In general, creditors, including divorcing spouses, cannot reach these plans. There is an exception for a Qualified Domestic Relations Order ("QDRO" pronounced "KWAD-row").

Under a QDRO, a spouse, former spouse, child or any other person who is a dependent may receive qualified plan assets belonging to the participant. A QDRO is a specific type of domestic relations order from a court that creates an alternate payee's right to receive all or part of the benefits payable under a participant's plan. It does not alter the amount of the benefits under the plan.

There are precise procedural rules governing how a QDRO must be created and administered. The QDRO must contain 1. the name and last known mailing address of the participant and each alternate payee; 2. the name of each plan to which the order applies; 3. the dollar amount or percentage (or the method of determining the amount or percentage) of the benefit to be paid to the alternate payee; and 4. the number of payments or time period to which the order applies.

A QDRO may not require a plan to provide an alternate payee with a form of benefit that is not otherwise available under the plan. A QDRO cannot require a plan to provide for increased benefits. It cannot require a plan to pay benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a QDRO. (For example, a QDRO for the divorce from the second spouse can't change a QDRO for the first spouse.) Lastly, the QDRO cannot require a plan to pay benefits to an alternate payee in the form of a qualified joint and survivor annuity for the lives of the alternate payee and his or her subsequent spouse.

Since IRAs are not subject to the "anti-alienation provision" a QDRO is not necessary to divide an IRA. IRA assets may be divided in accordance with a court decree or a property settlement agreement approved by the court. The former spouse who receives part or all of the IRA is required to treat the assets as his or her own IRA. Be careful. If an individual gives IRA assets to a former spouse without a court decree or a property settlement agreement approved by the court and authorizing the change in ownership, the former spouse who withdrew part or all of the IRA will be required to include the transferred amount in income — that is, the IRA is treated as distributed to the owner.

An amount distributed to the former spouse from a Roth IRA is tax- and penalty-free, but an amount distributed in accordance with a separation agreement that was not approved by a court is not eligible to be rolled over or transferred to an IRA of the former spouse.

Divorcing spouses must remember to change all of their beneficiary designations.

Read more in Lancaster Online.

 

Tax tip | Divorce can impact taxes

This year, the deadline is April 17 for federal and state returns.

If you were recently divorced and are paying or receiving alimony under a divorce decree or agreement, you need to consider the tax implication for your 2006 federal income tax return.

Alimony payments received from your spouse or former spouse are taxable to you in the year you receive them. Because no taxes are withheld from alimony payments, you may need to make estimated tax payments or increase the amount withheld from your paycheck.

Alimony payments you make under a divorce or separation instrument are deductible if certain requirements are met. Any payments not required by such a decree or agreement do not qualify as deductible alimony payments.

Child support is never deductible. If your divorce decree or other written instrument or agreement calls for alimony and child support, and you pay less than the total required, the payments apply first to child support. Any remaining amount is then considered alimony.

For more information, go to the IRS website.

Source: The State.

Roses, Candy and Taxes: Tax Effects of Marriage, Divorce Life Changes Can Have Major Tax and Financial Implications

Whether you’re tying the knot or severing the tie, Valentine’s Day is a natural time to examine the tax implications of marriage and divorce. H&R Block offers these tax tips if you’re considering one of these life changes.

More than just wedding gifts and thank you notes, marriage also means planning for a joint financial future, including how the couple’s tax situation has changed: Marriage means choices.

The IRS allows married couples to file using the “married filing jointly” or “married filing separately” status. Each has advantages that can be difficult to sort out. For example, if you claim medical expenses or other itemized deductions that are limited by your adjusted gross income, filing separately may be the way to go. But if you want to claim most tax credits or deduct your IRA contribution, you’ll probably need to file jointly. Consult your tax professional to determine the right choice for your first time filing together.

Social Security numbers don’t change, but anyone who has changed their last name will need to apply for a new Social Security card. If the name and number don’t match, the IRS might delay processing of the return, which means a refund could take longer than usual to arrive.

Marriage also means adjusting retirement savings. Besides changing filing status on an employer’s 401(k) account, newly married taxpayers also should consider increased limits for tax-deductible IRA contributions. If the couple’s income meets certain limits, they could qualify for more of a deduction. In some scenarios, one spouse also may “borrow” from the other’s earnings to meet the limits.

Inform the IRS of a new address. If the IRS does not have the correct address on file for a newly married couple, it could take longer for a refund to arrive. Taxpayers shouldn’t count on mail to be automatically forwarded and should consider filing Form 8822 to inform the IRS.

Divorce also can change a taxpayer’s financial situation. The best advice is to understand the divorce agreement and its terms, especially key components that could complicate a tax return.

Alimony is taxable and deductible. The person who provides alimony can claim the payments as a deduction, while the person who receives it can avoid a large end-of-year tax bill by paying estimated taxes during the year. Unlike alimony, child support is not deductible or taxable.

Who claims children? The parent who has custody of a child usually can claim the child as a dependent. However, with the custodial parent’s consent, the parent without custody can claim the child. (The custodial parent may still be able to claim certain tax benefits related to the child, including head of household filing status, the Earned Income Tax Credit, and the child-care credit.)

Who is a head of household? There are several factors for determining the head of a household. A few include being considered “unmarried” on the last day of the year, having children or other dependents who live with you, and paying more than half the cost of providing a home for dependents. Taxpayers should consult with a tax professional to determine if they qualify for head-of-household status.

Divorce, annulment and legal separation are considered the same by the IRS for tax purposes. The way a tax return is affected by the situation depends on how the decree is worded, and in cases where state and federal law differ, the IRS will side with the federal government.

This article from dBusinessNews.

Deductibility Of Attorneys' Fees In Connection With Divorce

It’s that time of year again. Of course, the general rule is that lawyers’ fees and costs in connection with obtaining a divorce are not tax deductible. As with many general rules, there are exceptions:

1. Attorneys’ fees related to tax advice. I.R.C. §212(3). Areas having tax implications upon which an attorney may offer advice include the tax effect of the distribution of property, including retirement plans, tax deductibility of interest payments or installments to effectuate an equitable distribution of property, the allocation of the dependency exemption and child tax credit, whether a joint tax return should be filed, the tax effect of unallocated maintenance and child support, the tax implications of the form of alimony, and advice regarding the recapture of front end loaded maintenance in the first three years following separation.

Practice tip: it is not helpful for the client wishing to tax deduct some attorney fees to have a provision in the marital settlement agreement that no tax advice was given.

2. Attorneys’ fees related to the production or collection of taxable income may be deductible. I.R.C. §212(1). For example, the payee of taxable alimony may be entitled to a deduction for attorney fees in generating the production or collection of this taxable income and fees in connection with securing an increase in taxable alimony may also be deductible. Attorney fees for obtaining income producing property are not deductible, but could arguably be added to the tax basis of the property.

A taxpayer may deduct only fees paid to his or her own attorney, unless the fees of the other party are paid as alimony.

Any attorneys’ fees that are legitimate income tax deductions are deductible only to the extent that all of the miscellaneous deductions in the aggregate exceed 2% of the taxpayer’s adjusted gross income. There is also an “applicable amount” which may reduce the otherwise allowable deduction.

Lawyers must be very careful not to overstate the amount or portion of attorneys’ fees that relate to tax deductible advice or legal efforts. I.R.C. §6701, Penalties for Aiding and Abetting Understatement of Tax Liability.

From Diana Skaggs and the Divorce Law Journal.

Tax Court Denies Dependency Deduction for Non-Custodial Parent Because Taxpayer Did Not Include a Signed Form 8332 With His Return

The tax consequences of separations can impact a number of areas. One such area is the deduction for dependents.

In Smith v. Commissioner, the United States Tax Court (Tax Court) addressed the issue of whether the taxpayer, a non-custodial parent, could claim the dependency deduction. The Tax Court also addressed whether the taxpayer could claim the child care credit, child tax credit, and earned income credit.

The taxpayer had a biological child with a woman (mother) that he never married. During the year in question (2003), the taxpayer and the mother did not live together and the son lived with the mother and her husband during the majority of the year. The taxpayer and the mother did not have a written agreement regarding who could claim the child as a dependent. Both the taxpayer and the mother claimed the child as a dependent and the IRS denied the taxpayer's dependency deduction, as well as other child-related credits. The taxpayer did not attach to his 2003 return a Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) or similar statement.

Deduction for Dependents: A taxpayer is generally allowed a deduction for each dependent (see IRC section 151). A dependent includes a son or daughter of the taxpayer in which the taxpayer provides over half the support during the year (see IRC section 152).

Divorced or separated parents: A child that receives over half its support from parents that are divorced, separated or live apart during the last six months of the year is treated as receiving over half the support from the parent that had custody for the greatest part of the year. The non-custodial parent may claim the dependency deduction if the individual files Form 8332 or similar statement that the custodial parent will not claim the child as a dependent.

Court Decision: The Tax Court held that the taxpayer was not entitled to the dependency exemption deduction since he was a non-custodial parent (i.e., did not have custody over half of the year) and did not attach Form 8332 to his return.

The Tax Court also denied the child care credit and child tax credit since those credits require that the taxpayer satisfy the dependent requirement under section 151. Lastly, the Tax Court also denied the earned income credit because the child's principal place of abode was not with the taxpayer for more than half the year.

Read it all at Family Law Taxation blog.

It's Tough to Deduct Divorce Costs as a Small-Business Expense

QUESTION: I own my own business. Recently, I divorced my wife. During the proceedings, there was a heated argument over whether or not my ex-wife was to receive a portion of it. In the end, the business was considered mine completely and she received nothing from the business.

Can I claim the legal fees on my tax returns, due to the fact that my business became part of the divorce?

ANSWER: Well, we checked. "Unfortunately, it doesn't sound like it," says Joseph R. Kluemper, senior tax manager at BDO Seidman in New York. "The general rule is that attorney fees related to divorce are nondeductible." Basically, the Internal Revenue Service sees your divorce as a personal matter, even though the end of your marriage had significant business implications.

There's one loophole that might work for you. Did any part of the legal discussions have to do with tax advice? Perhaps your lawyer outlined the potential tax consequences of splitting the business with your ex-wife. If that's the case, you can always deduct fees related to tax-planning advice as a miscellaneous deduction, as long as the fees exceed 2% of your adjusted gross income. The best way to handle this is to request a detailed billing statement from your attorney, which would separately itemize any deductible services that involved tax advice, says Leon Finkel, partner at Chicago divorce firm Berger Schatz.

Incidentally, in case you thought of this, you couldn't have paid the attorney's fees through the business and then written that off as a business expense. You're entitled to deduct a number of small-business costs — things like office supplies, insurance premiums and retirement contributions — because they are "normal and ordinary" (the IRS's litmus test) in your line or work. A divorce (we hope) doesn't meet that definition.

One last thing: Be thankful your business has survived the divorce. Many businesses — especially those in which both spouses are heavily involved in day-to-day operations — aren't so lucky. In some rare cases, divorced entrepreneurs remain together for the sake of the business. It sounds like you've kept your business while closing a chapter on your past — so you've likely come out ahead, even if it's not tax-deductible.

Today's Q & A from Smart Money.

Exemption hinges on custody time

Q. My divorce degree lets my ex-husband claim one of our two children on his tax return even though they both live with me. Since my ex-husband is behind on paying child support, can I claim both children?

A. Being behind on child support payments does not typically affect the right to claim a dependency exemption for a child.

With divorced taxpayers, the general rule is that the parent with custody of the child for the greater part of the year receives the dependency exemption as long as the child does not provide more than one-half of his or her own support. If a child spends an equal amount of time with each parent, the parent with the higher adjusted gross income will receive the dependency exemption.

Of course, there are exceptions to this general rule. One such exemption is with pre-1985 divorce decrees or separation agreements between parents, which grants the noncustodial parent the dependency exemption. In such a case, the noncustodial parent receiving the dependency exemption must provide at least $600 of support for the child during the year. The other exception to the general rule is when the custodial parent releases the right to claim the dependency exemption for a child to the noncustodial parent.

This transfer is granted by the custodial parent signing a written waiver. Generally, IRS Form 8332 is used for these purposes and must be attached to the noncustodial parent’s tax return for each year a dependency exemption for the child is claimed. The divorce decree can also be used if it addresses specific issues required by the IRS. Additionally, for the noncustodial parent to claim the child on his or her tax return, the child must receive over half of his or her support for the year from one or both of the parents.

Public assistance payments, such as Temporary Assistance for Needy Families, are not considered support provided by the parents. Also, the child must have been in the custody of one or both of the parents for more than half the year. IRS Form 8332 or a similar statement can be used to release the claim of exemption for a child for the current year, specific future years or all future years.

Your divorce decree, if specifically worded, can serve as an equivalent statement in lieu of Form 8332, and your ex-husband can use it to claim the dependency exemption.

To serve as your release of the exemption for one of your children, your divorce decree or agreement must include all of the following information:

•The noncustodial parent can claim the child as a dependent without regard to any condition (such as payment of support).

•The other parent will not claim the child as a dependent.

•The years for which the claim is released.

Q & A from the Kansas City Star.