Divorce
No one likes divorce. As an accountant I often see the devastating financial effects that divorce has on people. When it comes to divorce you immediately consult an attorney. An accountant is often the last person on your mind. This is unfortunate because we can offer important information relating to tax law and IRS procedures.
While it is to both parties benefit if they are able to work together, this is often not the case. You must take certain steps to protect your financial future. Failure to do so can have negative consequences for years to come.
If you have knowledge of the impending divorce there are steps you can take to help protect yourself. Remember the old adage, possession is 9/10 of the law.
Birth certificates - You and the children *
Social Security cards- You and the children *
Passports- You and the children *
Social Security cards- You and the children *
Passports- You and the children *
Complete copies of tax returns for at least the last three years *
Copies of all deeds, stocks, bonds, brokerage statements, etc. *
Inventory all items in your safe deposit box *
Copies of all debt paperwork - Loans, mortgages, leases, credit cards etc.*
Copies of wills, marriage certificate, trust agreements, marriage contracts, etc.*
Copies of insurance agreements - Life, auto, business, health *
Inventory of home and personal assets - Photos will help with proof *
Copies of all monthly bank statements for the last 3 years *
Copies of all retirement plans and statements *
Family business - Copies of Financial Statements and tax returns *
Copies of credit reports from the 3 major reporting companies. *
Copies of credit reports from the 3 major reporting companies. *
Contact all credit card companies, mortgage company and other debtors. Find if you have a joint or individual account. *
Try to have cash, or travelers checks so that you have enough money to last you until you see a judge to determine the distribution of assets.
While in the process of a divorce, there are several tax issues that will arise. A good divorce attorney will discuss the tax consequences of decisions.
Alimony for tax purposes is deductible for the payor and taxable to the payee. There are specific requirements that must be made for payments to be considered alimony.
Child Support for tax purposes is not deductible for the payor and not taxable to the payee. This is true no matter what the payment is called in the divorce papers. In making the determination the IRS looks at the "characteristics" of the payment. One such characteristic of a child support payment that may be called Alimony in the divorce decree is the stipulation that the payments stop if the child's situation changes. (age, school status, residency, etc)
Who gets to claim the children?
While in the process of a divorce, there are several tax issues that will arise. A good divorce attorney will discuss the tax consequences of decisions.
Alimony for tax purposes is deductible for the payor and taxable to the payee. There are specific requirements that must be made for payments to be considered alimony.
Child Support for tax purposes is not deductible for the payor and not taxable to the payee. This is true no matter what the payment is called in the divorce papers. In making the determination the IRS looks at the "characteristics" of the payment. One such characteristic of a child support payment that may be called Alimony in the divorce decree is the stipulation that the payments stop if the child's situation changes. (age, school status, residency, etc)
Who gets to claim the children?
In general, if you want to claim your child as a dependent, you must be the custodial parent (i.e., the parent with whom the child lived for the greater number of nights during the year). If you are the noncustodial parent, the custodial parent must sign a written declaration that he or she will not claim your child as a dependent, and you must attach this written declaration to your tax return.
Make sure you have the proper written declaration, or the IRS will deny your dependency exemption. To release the dependency exemption, the custodial parent may use either Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a similar statement containing the same information as the form.
If you have a divorce decree or separation agreement that went into effect after 1984 and before 2009, you may be able to attach certain pages from the decree or agreement in place of Form 8332. The decree or agreement must state all three of the following:
• The noncustodial parent can claim the child without regard to any condition, such as payment of support.
• The custodial parent will not claim the child as a dependent for the year.
• The years for which the noncustodial parent can claim the child as a dependent.
The option to attach pages from the decree or agreement is no longer available to noncustodial parents whose divorce or separation went into effect after 2008. These individuals must attach Form 8332 or a similar statement that was executed for the sole purpose of releasing the dependency exemption.
The parent who is eligible to claim the child as a dependent is eligible to claim all education credits regardless of which child paid the tuition.
There are times when a child switches homes during the year. If this is the case, the parent with the most amount of days wins for residency of the child. If you are dealing with a scoundrel for an ex., and you are now entitled to claim the child, take my advise and notify the other parent in writing that you can now claim the child and are planning on doing so. Even if you think your ex agrees with the decision FILE EARLY.
If your ex files first and claims the child, your return will be rejected by the IRS for electronically filing and you will have to file a paper return and attach a note explaining your situation and why you are entitled to claim your child as a dependent. This will hopefully begin an investigation by the IRS who will figure out who can legally claim the child. This will hold up your refund which could be substantial if you are entitled to the earned income credit.
The Earned Income Credit goes to the custodial parent even if the custodial parent has signed a written document allowing the other parent to claim the child as a dependent.
Head of Household don't file as "Single" on your tax return if you qualify to file as "Head of Household". You will get a bigger refund if you file as Head of Household. If your ex-spouse claims your child as a dependent on his or her tax return, but the child lives with you, then you probably can still file as Head of Household.
The parent who is eligible to claim the child as a dependent is eligible to claim all education credits regardless of which child paid the tuition.
There are times when a child switches homes during the year. If this is the case, the parent with the most amount of days wins for residency of the child. If you are dealing with a scoundrel for an ex., and you are now entitled to claim the child, take my advise and notify the other parent in writing that you can now claim the child and are planning on doing so. Even if you think your ex agrees with the decision FILE EARLY.
If your ex files first and claims the child, your return will be rejected by the IRS for electronically filing and you will have to file a paper return and attach a note explaining your situation and why you are entitled to claim your child as a dependent. This will hopefully begin an investigation by the IRS who will figure out who can legally claim the child. This will hold up your refund which could be substantial if you are entitled to the earned income credit.
The Earned Income Credit goes to the custodial parent even if the custodial parent has signed a written document allowing the other parent to claim the child as a dependent.
Head of Household don't file as "Single" on your tax return if you qualify to file as "Head of Household". You will get a bigger refund if you file as Head of Household. If your ex-spouse claims your child as a dependent on his or her tax return, but the child lives with you, then you probably can still file as Head of Household.
Property Transfers There is usually no reportable gain or loss on the transfer from one spouse to another, or to a former spouse if the transfer is "incident to divorce". ( occurs one year of divorce date or is made according to the terms of divorce and not more than six years after the divorce date.) Since there is no gain or loss than the basis of the property will remain the same.
If a joint return if filed, both husband and wife can be held jointly and separtly liable for the tax due as well as interest and penalty. This applies without regard to what is in the divorce decree. There are special situations in which you may petition the IRS for releif. These are too complicated to cover in this blog, but you if you think you may qualify, contact us or your tax advisor.
Tax challenges during and following divorce are common, but can be minimized with knowlege of tax law and IRS procedure. We providfe this service free to our clients and as a year round accounting and tax office we are available when you need us, not only during the official "tax season".
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