When last we met, I left you hanging with a couple of divorce related tax thoughts to keep in mind. Let’s wrap up this discussion with a few more things to think about while planning (or waiting for) the next spiteful spousal action(!)
Transfers of property-“Generally”, property transferred from one spouse to another can be made without tax consequences to either party, as long as the transfers are made “incident to the divorce”. As with anything that IRS uses the word “generally” for, there are exceptions and rules to follow to make sure that the transfers don’t create taxable income for one of the spouses.
Marital home-Similar to the discussion above, if the transfer of one spouse’s interest in the marital home is incident to the divorce, there’s no gain recognized on the transfer. Additional things to consider are who gets the deduction for mortgage interest and real estate tax, and whether there’s excludable gain on the sale of the ‘principal residence’ (and who gets it).
Filing status-I covered this subject briefly last week, but I wanted to add one other ‘curveball’ to this discussion. Under certain circumstances, an individual may be able to file a return as “head of household”, which will result in a lower tax bill than “married filing separately”. There are a number of requirements that must be met, in order to do this.
Alimony and child support-Alimony is deductible to the payer and taxable income to the recipient, while child support is nondeductible and nontaxable.
Attorney fees-As with many other issues, attorney fees generally are not deductible. Fees paid for the actual divorce/separation/custody/etc issues aren’t deductible, but fees paid for tax planning and tax advice are. If that’s the case, be sure the invoice splits out the portion of the fees paid for tax related services.
As you can probably tell, since it’s taken two articles to barely scratch the surface of the topic “divorce and taxes”, this is a very complex and treacherous area to deal with. To repeat what I said at the beginning of part 1, I strongly recommend that you engage the services of an attorney and a CPA to help you through both the legal and tax aspects of the divorce.
I hope this two-part article has been of help to you, or people you know who are going through one of the most stressful of life events. Please feel free to pass a link to this article to someone who may benefit from it, and leave any comments you may have. If you have any subjects that you’d like to see addressed in future articles, please let me know.