Tax Implications of Various Issues Associated With Divorce

I ) Alimony and Tax Implications:

Alimony payments are tax deductible for the ex-spouse making the payments and taxable to the ex-spouse receiving the payments prior to 2019.

Amounts paid as alimony or separate maintenance payments under a divorce or separation agreement executed after 2018 will not be deductible by the payer or includible in
the income of the recipient.

The tax treatment of alimony payments based on agreements entered prior to 2019 makes it tempting for divorcing spouses to try to disguise properties settlement and child support as alimony.

For that reason, the IRS has strict rules about what is considered alimony for tax purposes the IRS will consider money paid as alimony to be property settlement funds and not deductible if it is “front loaded” (concentrated in too short period of time directly after the divorce).

II) Filing Status And Its Tax Implications

-If an individual is still married, he or she has the option of filing “married filing jointly.” This is the most desirable status for most people. – Persons who are legally divorced must file as ‘single’ or ‘head of household’ (whichever is more desirable)
A person can file as ‘head of household’ if:

1) They and their spouses have not lived together during the past 6 months.
2) Their home was the main home for the qualifying dependents;
3) They paid more than half of the cost of keeping up their home for at least half of the year and
4) They are entitled to claim the dependency or child tax credits for their qualifying dependent.

III) Children as Dependents And Tax Implications

The IRS presumes that the custodial parent is entitled to claim the children as dependents. The custodial parent may however “trade” the dependent to the non-custodial parent using form 8832.

Although taxpayers cannot claim a deduction for dependents, eligibility to claim a child as a dependent remains important for determining who can claim the child tax credit, the additional child tax credit, and the credit for other dependents.

The custodial parent paying college expenses is entitled to the American Opportunity Credit and Lifetime Learning Credit for the child’s college expenses.

IV) Liability for Taxes Owed And Tax Implications

Under the IRS’ “innocent spouse rule,” taxpayers may not be responsible for the ex-spouse’s failure to pay taxes due while they were married and firing joint returns if they can prove that it did not know and had no reason to know that the ex-spouse was misrepresenting information on their joint tax return.

V) Transfer Of Property And Its Tax Implications

There is no tax gain or loss in transferring property during a divorce. A taxpayer may, however, be required to file a gift tax return depending on the details of the transactions.