Divorce and Tax Assets

By Susan M. Keenan

Unfortunately, many marriages end in divorce court.  The division of marital assets usually involves who is getting the home, the car, the boat, the vacation property, and the cash.  Typically, other issues come into play as well, such as who is getting custody of the children, custody of the pets, and custody of the family photographs.  It goes without saying that a distribution of furniture, appliances, lawn ornaments, and much more is determined as well.

 

What are often forgotten about until the end of the year are the tax assets that are available.  By then, it may be too late to work out an amicable solution.  This lack of foresight can wind up costing someone thousands of dollars over the years ahead.

 

The division of the tax assets is a decision that is best made during the divorce proceedings while there is still room for negotiation.  Nonetheless, these issues need to be addressed.

 

Who gets the tax exemption for the children is often a touchy subject.  Typically, both parents want this deduction.  Attempt to negotiate this one as fairly as possible.  Some couples have opted to share this deduction when more than one child is involved.  For example, the mother may take the exemption for the youngest and the father might take the exemption for the oldest. 

 

Moreover, placing a contingency on the exemption is a common practice.  Specifically, the parent paying child support must make timely payments throughout the year, as well as be paid up to date, in order to claim the exemption.  This should all be included in the legal paperwork attached to the divorce. 

 

The tax exemption should not be wasted either.  If a parent does not have a large enough income, the benefit of the exemption is nonexistent.  Likewise, if the parent has too large of an income, then the tax benefit is again nonexistent.  Both parties need to realize that it is in the best interest of the children for someone to reap the benefits of this tax deduction.

 

Who gets to claim status as head of household is another sticky point for some couples.  Typically, tax advantages are attached to the head of household status.  In cases where equal placement of the children exists as in shared custody, an exception can occur.  If there is more than one child, the parents can prearrange and include documentation with the divorce documents stipulating which parent will claim which child.  This must be accomplished prior to the final disposition of the divorce proceedings.

 

Are any of the attorney fees tax deductible?  To put it briefly, yes.  However, it is important to note that tax fees that are paid over the course of more than one year will have to be prorated.  The fees are deductible only if the individual itemizes their deductions and the fees exceed the percentage required by the federal government.  The following fees may be tax deductible depending on the individual’s circumstances: fees for tax planning, fees for securing interest in qualified retirement plans, and fees for obtaining taxable income.

Are maintenance payments tax deductible and can you avoid making them non-tax deductible?  Yes and yes.  However, very specific rules must be followed in order for maintenance or alimony payments to be tax deductible.  Probably the most important guideline is that the payments must be made in cash.  Therefore, providing services or property of value in lieu of cash does not qualify. 

 

Moreover, an agreement requiring maintenance payments must exist.  Additionally, the individual making the payment must not live in the same household as the individual receiving the payment.  The payments must be made to the ex spouse and cannot be made to pay off his or her bills.  The payments cannot be referred to as non-tax deductible in the divorce documents.  Furthermore, the payments must stop at the time of the individual’s death.

© Doityourself.com 2006