Tax Tips for Divorcing Couples

It’s that time of year again – tax time. When parties are going through a divorce there are important considerations to keep in mind with respect to tax implications.

1. Alimony is taxable. Child Support is not.

When negotiating divorce agreements, clients should be mindful that spousal support is taxable to the payee spouse and tax-deductible to the payor spouse. Child Support is not taxable.

2. Joint Tax Returns Means Joint Liability

If you are divorced, you are jointly and individually responsible for any tax, interest, and penalties due on a joint return for a tax year ending before your divorce. This applies even if your Judgment of Divorce states that your former spouse will be responsible for any amounts due on previously filed joint returns.

In some cases, a spouse may be relieved of the tax, interest, and penalties on a joint return.

Also, be aware that an overpayment shown on your joint return may be used to pay the past-due amount of your spouse’s debts. This includes your spouse’s federal tax, state income tax, child or spousal support payments, or a federal nontax debt, such as a student loan. You can get a refund of your share of the overpayment if you qualify as an injured spouse.

3. Custodial Parents are Entitled to Claim Children

In most cases, because of the residency test, a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if the certain requirements under the Internal Revenue Code are met.

4. Transfer Between Spouses

Generally, no gain or loss is recognized on a transfer of property from one spouse to a former spouse, but only if the transfer is incident to a divorce.

This rule applies even if the transfer was in exchange for cash, the release of marital rights, the assumption of liabilities, or other considerations.

For more information on Divorcing Couples Tax Considerations see IRS Publication 504.