"I am a marvelous housekeeper. Every time I leave a man I keep his house." Zsa Zsa Gabor
With a divorce, like any other life event, it is very important to carefully consider the tax consequences.
Before discussing specific tax planning aspects of divorce let me first provide some basic information on the tax treatment of various divorce-related topics.
Some of the items listed below are extremely detailed in nature, and I could easily devote multiple postings to any one of them. For the purposes of this posting I only present a brief introduction. For more specific information on how any of these items may relate to your specific situation I suggest you contact a tax professional.
· Your filing status is determined by your marital status on the last day of the year. If you are legally divorced on December 31st you will file your return for that year as either Single or Head of Household. If the divorce is not finalized and you are still legally married on December 31st you generally must file as either Married Filing Joint or Married Filing Separate. If a dependent child is involved the custodial spouse may be able to file as Head of Household.
· Alimony is allowed as an “above-the-line” deduction by the person paying it and must be claimed as taxable income by the person receiving it. Child support is neither deductible nor taxable. Required payments to a third party on behalf of a spouse under the terms of a divorce or separation instrument can qualify as alimony. This include payments for a spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as received by the spouse and then paid to the third party. Even though a required annual payment is described as “alimony” in the divorce decree, if the payment is reduced or stops on any event relating to a child (i.e. reaching a certain age, graduating from college, marrying, dying, earning a certain amount of income) that amout is considered to be child support and therefore not deductible.
· Generally the cost basis of an asset, and its “holding period”, does not change as a result of divorce. If, prior to divorcing, a couple owns a personal residence with a cost basis of $200,000, the cost basis for the spouse who receives title to the property as a result of the divorce remains $200,000 – regardless of the market value of the property at the time of the divorce.
· A divorced parent can claim unreimbursed medical expenses paid for his/her child as a medical deduction on Schedule A (subject to the 7½% of AGI exclusion) whether or not he/she is entitled to claim the child as a dependent. For purposes of the medical expense deduction the child is considered to be the dependent of both parents.
· An education credit can only be claimed by the parent that claims the student as a dependent. This is true even if the divorce decree requires the other parent to pay the child’s tuition directly to the college or university.
· Only the custodial parent can claim the Credit for Child and Dependent Care Expenses. This is true even if the non-custodial parent claims the child as a dependent.
· Only that portion of the legal fees for a divorce that directly relates to providing tax advice or to efforts to obtain taxable alimony are deductible as a miscellaneous deduction on Schedule A (subject to the 2% of AGI exclusion). Legal fees paid to avoid paying alimony are not deductible.
To be continued. . . . . . . .