Divorce can involve a number of difficult issues, such as child custody, who gets the house, how other assets are divided, and how support and alimony are determined.
But one thing a lot of people don’t realize is that taxes can also become very complicated when people get divorced. That’s why it’s always a good idea to seek advice from an attorney or other professional if you’ve recently split up. Even if you’ve always done your taxes by yourself, there are a lot of tricky issues after a divorce, and it’s easy to make a costly mistake.
For instance, a key question is whether to file a joint return or separate returns. If your divorce has become final by December 31 of a given year, the IRS considers you as single for that entire year and you can’t file a joint return – even if your divorce didn’t become final until December 30! On the other hand, if your divorce isn’t final on December 31, you can still file jointly – even if you officially divorce well before taxes are due on April 15.
Filing jointly can often save taxes, but if you’re expecting a refund, you’ll have to work out who will receive it and how it will be split. On the other hand, just because you can file jointly doesn’t mean you have to. No one can make you sign a joint return; you can always elect to file separately. You might want to have your taxes prepared both ways to see which is more advantageous for you.
If your spouse would prepare a joint return, and you have any reason to suspect that he or she might not be completely honest, you should definitely speak with your attorney about this. If you sign a joint return, you could in some cases be held legally responsible for any misrepresentations.
You might also have heard that alimony payments are deductible on your taxes, while other divorce-related payments are not. That’s true – but the tricky thing is that it’s not always clear whether a payment qualifies as alimony.
For instance, an Indiana man recently gave his ex-wife $22,000 to reimburse her for paying off the mortgage on their marital home. He deducted this amount as alimony on his federal income tax return. But the IRS objected, and the U.S. Tax Court said the payment wasn’t alimony because it was tied to the terms of the mortgage.
And in Florida, a man claimed an alimony deduction for $15,000 he was ordered to pay his ex-wife to partially reimburse her for her attorney fees. The U.S. Tax Court again agreed with the IRS. The court said the money wasn’t “alimony” because under state law, the husband would owe the money even if the ex-wife died before the payment was made.
Here are some other difficult tax issues that can arise at divorce:
- There are many tax benefits to having a child, but if parents have joint custody, it’s not always clear which parent is entitled to these benefits. These include the dependent child exemption, the tax credit for a dependent child, the dependent care credit, and the earned income tax credit.
- If a couple divides assets at divorce that have appreciated in value, such as stocks, and the assets are later sold, there can be issues as to who has to pay the capital gains tax and how much is owed. (If a home is sold at divorce, there can also be capital gains issues.) You should be aware that if you pay attorney fees relating to dividing capital assets in a divorce, in some cases the amount of the fees can be added to the property’s tax basis, thus reducing the capital gains tax.
- Speaking of attorney fees, these are generally not deductible in a divorce, but in some cases they are, such as if you pay attorney fees for tax advice or to enforce an alimony obligation against a spouse who has fallen behind in his or her payments.
- If one spouse is not a U.S. citizen, then payments made at divorce may be subject to gift tax. (There’s generally no gift tax on payments made between spouses, but there’s an exception if one spouse in a non-citizen.)
Of course, taxes can be very complicated even without a divorce. But if you’re getting divorced, it’s wise to talk with a lawyer or other professional to make sure you’re doing everything correctly, and to take advantage of any savings to which you might be entitled.