Taxes in Divorce

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Published: 2010-1-14

Article provided by David M. Gabriel & Associates

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If you are getting a divorce, you might be surprised to discover that you have not one, but two spouses to deal with in the process. The "third spouse" is the nickname that has been given to federal tax collectors at the IRS. The reason divorcing couples consider the interests of the third spouse in a divorce is because the financial decisions they make may have tax implications that ought not be ignored.

Divorceinfo.com provides information on the role of the IRS in marital dissolutions that divorcing couples should consider. When it comes to capital gains treatment of a principal residence, for example, the spouse who vacates the home in the divorce will not be penalized if the divorce decree or written separation agreement grants the other spouse the right to live in the home. In those circumstances, the residency of the spouse who remains in the marital home will be credited to the absent spouse for computing principal residency for capital gains purposes. Thus, if the house is sold at a gain, the absent spouse can avoid capital gains tax as long as the spouse who remained in the home lived there for two of the five years prior to its sale.

When it comes to support payments, the IRS treats alimony and child support differently: the spouse making the payments receives preferential tax treatment for paying alimony, while the spouse accepting the payments receives preferential tax treatment for receiving child support. This tax law conflict requires divorcing couples to think carefully about how each payment made — whether it be outright support or payments targeted for specific needs like insurance, mortgage payments or car payments — will be classified.

Consult with an Attorney

Receiving the advice of an attorney knowledgeable in tax law is essential in a divorce, as the IRS promulgates many rules that are designed to prevent divorcing couples from treating payments in the nature of child support or other obligations as alimony solely to obtain favorable tax treatment. The temptation to do so stems from the fact that such treatment is most advantageous to the paying spouse, usually the one with the higher income, who will receive the most benefit from favorable tax treatment.

Divorcing couples should also be aware of other useful information on taxes in a dissolution, such as when couples may freely trade child-related claims. On exemptions, couples may trade them among themselves, but when it comes to child care credit, trades are not permissible. Child care credits can only be claimed on the taxes of the custodial spouse.

Even the timing of a divorce may have tax implications. So, when contemplating a divorce, it is useful to become familiar with the fundamental taxation issues applicable to divorce and to consult an attorney to find out your options and answer your questions regarding the impact divorce may have on your taxes.