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Divorce touches almost every aspect of both spouses’ lives, especially finances. Thus, it is common for those going through divorce and those whose divorce has been recently finalized to have several questions concerning taxes. Below are several frequently asked questions surrounding post-divorce tax concerns along with guidance on how to address them. Please note however that the list of questions and explanations below is not exhaustive and may not address every possible tax concern associated with divorce. With this being said, it is important for anyone contemplating divorce, going through divorce or whose divorce has recently been finalized to seek the guidance of a certified public accountant or financial advisor, as these professionals will be able to provide insight and advice on how to handle post-divorce tax concerns as well as other post-divorce financial concerns. Additionally, more information concerning taxes and divorce may be found in the IRS’s Tax Information for Divorced and Separated Individuals booklet.
Is alimony and/or child support taxed?
Generally, spousal support received is considered taxable income, and thus must be included by the recipient spouse on his or her tax return as income. On the other hand, the paying spouse may deduct alimony payments on his or her tax return. Unlike alimony however, child support is neither tax deductible nor tax includable, meaning it is not viewed as income to the recipient spouse or as a deduction for the paying spouse.
Which parent may claim the child dependency exemption after divorce?
Federal and Georgia state law allows the custodial parent to claim the dependency exemption for all children on their income tax returns. Alternatively, the parents may opt to allocate the dependency exemptions between themselves in another manner. For example, parents may agree to allow the custodial parent to claim the dependency exemption on the youngest child, and allow the non-custodial parent to claim the dependency exemption for the older child. Depending on the circumstance, it may be advisable for parents to come to such an agreement as it will allow both parents to potentially reduce their tax liability. If the parents are unable to come to such an agreement, the custodial parent will, by default, be allowed to claim the exemption. It is not possible for both parents to claim the exemption for the same child.
Are attorney’s fees and accountant’s fees tax deductible?
Generally, attorney’s fees paid for legal representation are not tax deductible. However, fees paid specifically for income or estate tax advice may be tax deductible. Also fees paid to determine the appropriate alimony award or fees paid to collect alimony may be tax deductible. To determine which, if any, of these deductions may be available to you, seek the advice of an accountant or tax consultant when it comes time to prepare your annual tax returns.
I fear my spouse failed to truthfully disclose all income on our joint tax returns, what should I do?
The Internal Revenue Service offers individuals who have reason to believe that their ex-spouses were untruthful on their joint tax returns has the ability to potentially shield themselves from the liability and penalties that may result from their ex-spouse’s fraud, by taking advantage of the Innocent Spouse Rule. The Innocent Spouse Rule is a provision found in the Internal Revenue Code that allows former spouses to elect to limit their liability arising from a joint return filed during their marriage to the liability that would have been attributable to them individually had the couple filed separately. I.R.C. § 6015. In essence, the innocent Spouse Rule protects spouses who fell victim to their ex-spouse's inaccurate or fraudulent joint tax return. For more information concerning the operation of the innocent spouse rule and how an ex-spouse may avail himself or herself of this provision of the Internal Revenue Code, see the IRS’s Innocent Spouse Questions and Answers.
Is money received from post-divorce retirement account distributions taxed?
Generally, when retirement accounts are divided in a divorce pursuant to a court order or qualified domestic relations order (QDRO), the funds received by the recipient spouse are not considered taxable income. However, this is only true if the funds remain in a retirement account or IRA owned by the recipient spouse. If the funds are distributed directly to the recipient spouse, and not maintained in a retirement account or IRA, these funds will be taxable as income to the recipient.
Is money or property received in divorce property settlements taxed as income?
Generally, according to the Internal Revenue Code, a transfer of property to a former spouse incident to divorce will not cause the recognition of gain or loss. What this means is that assets received will not be treated as a gain for the recipient spouse and will not be treated as a loss to the spouse parting with the asset. A transfer of property is incident to a divorce is defined as a transfer that occurs within one year after the date on which the marriage ceases or is “related to the cessation of the marriage.” See I.R.C. § 1041(a).