Tax Considerations When Filing for Divorce

June 2014Articles The Matrimonial Strategist

Aaron Weems’ article “Tax Considerations When Filing for Divorce” was published in the June 2014 issue of The Matrimonial Strategist. A synopsis is noted below.

Most people do not base their divorce or separation around tax-planning options. Tax issues are often left until an asset is sold, or the end of the year approaches without the prospect of a divorce decree being issued. Some tax liabilities should not be afterthoughts. This article highlights tax liabilities that can be of particular importance during a divorce.

Child Exemptions – Who gets to claim children on taxes is a frequent debate between parties. Some states allow their courts or domestic relations offices to assign exemptions between the parties while some are reluctant to make such a determination, and instruct the parties to follow IRS regulations.

Child Tax Credit – The Child Tax Credit is perhaps the most easily identifiable tax issue that arises during a divorce. Who may claim the child is a major area of dispute between parties.

Sale of the Marital Residence – The sale of the “main home” is a common occurrence in divorce cases. When a main home is sold, the IRS allows capital gains to be excluded from income taxes; a benefit that, when planned correctly, can create a significant opportunity for both parties to maximize their portion of the sale proceeds.

The Innocent Spouse and Relief from Joint Liability – Due to divisions of labor and responsibilities in marriage and relationships, one person will know, but not really know, how their finances work. For separated and divorced individuals, there is relief available through the IRS to alleviate a joint tax liability under certain circumstances.

Deducting Legal Fees Related to Divorce – Another difficult reality of litigating a divorce case with significant or complicated assets is that the parties are responsible for paying those legal fees with their post-tax income. As a general premise, people cannot deduct legal fees related to a divorce. However, the IRS does allow for the deduction of fees related to the taxpayer’s obtaining taxable alimony.