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A Divorce Tax Primer

By John S. Eory

Welcome to that time of year when thoughts turn to spring. As a baseball fan, my thoughts turn to Spring Training, while as a divorce lawyer, they turn to taxes. Why, you may ask? Well, with tax filings due April 15th, there will be no small amount of questions as to such issues as, "are my support payments taxable? Are they tax deductible? What about the assets I received or gave to my ex-spouse? Who gets to claim the children? How am I permitted to file? Can I file separately from my spouse? Should I do so?

This list is not exhaustive but provides a basis for discussion concerning the interplay of divorce and taxes which any person contemplating or going through a divorce should know, as should their attorney. So, here are some basic 'rules of the road":
 

1. Alimony paid in accordance with a properly drafted divorce agreement or Court Order is deductible to the person paying it and reportable as income to the recipient. Thus, if you are receiving alimony, you must set aside a sufficient portion to pay federal and state income taxes in order not to be unpleasantly surprised come tax time.
2. Child support is "tax neutral"; non-deductible to the payer or income to the payee.
3. A capital gain exclusion of $250,000 (single) and $500,000 (married) exists for the sale of a principal residence, defined as where you lived for any two of the past five years.  If after a separation, this rule tells us that the home must be sold within three years of departure for the exclusion to apply to the departing spouse.
4. Marital status for tax filing purposes is set on the last day of the year--December 31. If you are divorced before December 31, you must file as a single taxpayer or head of household if you qualify. If you are still married on December 31, you can file jointly or separately, although the latter is not recommended since the total combined tax liability is greater than in the case of joint filing.
5. If filing separately, the first to file's election of standard or itemized deductions requires the other filer to do the same. Ouch!
6. Joint tax return = joint liability despite what your divorce agreement or Judgment says. The IRS "innocent spouse" exceptions are very limited.
7. The custodial parent is entitled to claim the children as dependency exemptions unless otherwise agreed in writing.
8. Attorneys fees related to a divorce are not generally deductible, whether your own or paid to your spouse's lawyer. Tax advice related to the divorce is deductible, as are fees paid to determine or collect alimony.
9. If a person is obligated to pay child support and alimony but pays less than the monthly amount due, payments are first applied to satisfy the child support obligation (tax neutral) before alimony; see 1. above.

These are just some of the tax issues that permeate divorce cases. Others, such as when dealing with retirement plans, stock options, investments and private businesses are more complex. While intended to be helpful, my comments are not tax advice or legal advice and since tax rules, laws and regulations change frequently and may have changed by the time you read this article, working with qualified professionals is essential.

Full post as published by New Jersey Law Blog on February 08, 2011 (boomark / email).