Divorce and Taxes
DIVORCE AND TAXES
At Arizona Statewide Paralegal, we combine two important areas of expertise. We are registered tax preparers and we provide legal case management document preparation for couples who are divorced or separated. We have dealt with the intersection of divorce and taxes many times. We are familiar with how to prepare taxes after divorce and the various issues facing couples who are filing as divorced individuals.
The IRS has provided guidance for couples divorced during the 2013 tax year. We’ll discuss basic IRS tax rules that will help you make informed choices about filing status, exemptions, and payment and transfers of property that happen during divorce.
DIVORCE AND TAXES- Which Filing Status should I use?
Your marital status for 2013 depends on the day you obtained your final decree of divorce or separate maintenance. You are “unmarried for the whole year” if “you have obtained a final decree of divorce or separate maintenance by the last day of your tax year. You must follow your state law to determine if you are divorced or legally separated.” If you are unmarried, the choices given by the IRS for filing status are “single, head of household, or qualifying widow(er).”
If you obtained a decree of annulment by December 31st 2013, the IRS states in Publication 504 (2013) “you must file amended returns (Form 1040X, Amended U.S. Individual Income Tax Return) for all tax years affected by the annulment that are not closed by the statute of limitations. The statute of limitations generally does not end until 3 years (including extensions) after the date you file your original return or within 2 years after the date you pay the tax. On the amended return you will change your filing status to single or, if you meet certain requirements, head of household.”
The IRS gives additional guidance by stating you are married for the whole year “if you are separated but you have not obtained a final decree of divorce or separate maintenance by the last day of your tax year. An interlocutory decree is not a final decree.”
For individuals in same-sex marriage and for federal tax purposes, they are considered married if they were lawfully married in another state or foreign country whose laws authorize same sex marriage, even though Arizona does not recognize same-sex marriage. For purposes of the IRS the word spouse includes same sex spouse if they were married in a state that authorizes same-sex marriage. If the couple entered into a domestic partnership, civil union, or other relationship that is not considered marriage by the state law, then they are not married for federal tax purposes.
DIVORCE AND TAXES – Dependency Exemptions for Children
We often receive questions about which divorced or separated spouse will claim the dependency exemption for children. The basic IRS rules for claiming a child exemption requires that child be under 19 years old (or under 24, if a student) or any age if the child is permanently disabled. A child is considered a “qualifying child” for exemption purposes of the custodial parent. A custodial parent is “the parent with whom the child lived for the greater number of night during the year.” The other parent is the noncustodial parent.
The IRS goes further in explaining custodial parent when the divorce took place during 2013. If your divorce or separation was final in August, the custodial parent is the one with whom the child lived for the greater number of nights during the rest of the year after the decree was obtained.
For further guidance, the IRS states that a child is treated as “living with a parent for a night if the child sleeps at that parent’s home, whether or not the parent is present, or in the company of the parent, when the child does not sleep at a parent’s home (for example, the parent and child are on vacation together).”
If the child was with each parent an equal number of nights, then the parent with the higher adjusted gross income is considered the custodial parent for tax purposes. The IRS even addresses sleep overs by stating that “if a child was not with either parent on a particular night (because, for example, the child was staying at a friend’s house), the child is treated as living with the parent with whom the child normally would have lived for that night, except for the absence.”
DIVORCE AND TAXES – Spousal Maintenance/Alimony
The IRS defines alimony as “a payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce or separation instrument. Alimony is deductible by the payer and must be included in the spouse’s or former spouse’s income.” Child support, noncash property settlements, payments that are your former spouse’s part of community income, payments to keep up property owned by the paying spouse and use of the property owned by the paying spouse are not considered alimony for IRS purposes. There are also specific rules for homes that are jointly owner by former spouses which we can discuss when we meet with you for your consultation.
The IRS further clarifies that “a payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met:
- The payment is in cash [including electronic transfer, check or money order]
- The instrument does not designate the payment as not alimony.
- The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance.
- There is no liability to make any payment (in cash or property) after the death of the recipient spouse.
- The payment is not treated as child support.”
DIVORCE AND TAXES – QDROs and IRAs
Benefits paid under a QDRO to a former spouse should be included in the former spouse’s income. For traditional IRAs “if you get a final decree of divorce or separate maintenance by the end of your tax year, you cannot deduct contributions you make to your former spouse’s traditional IRA. You can deduct only contributions to your own traditional IRA. If your divorce decree (or other written instrument that is part of the divorce settlement) states that you are transferring a traditional IRA to your former spouse this is not considered a taxable transfer.”
DIVORCE AND TAXES – Property Settlements and Sale of Joint Property
There is no recognized gain or loss when you transfer property between spouses or former spouses if the transfer is part of a divorce. Even if the transfer was “in exchange for cash, or the release of marital rights, the assumption of liabilities, or other consideration.” There are a few exceptions to this rule that we can discuss in our consultation should they apply to you.
The IRS has provided considerable guidance with regard to how property transfers, dependent exemptions, sale of jointly-owned property and other divorce related tax issues are treated. At Arizona Statewide Paralegal we can assist in your tax preparation so that you make the best choices. We have a tax preparation planner on-line that you can access anytime. In addition, we are qualified e-filers and can ensure your refund is direct deposited so that you receive your money quickly and efficiently. Call us today to set up your tax consultation appointment.