Taxes During Divorce: What You Can and Cannot Deduct

taxes during divorceBy Tara N. Brewer

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When facing a divorce, tax season can become quite complicated.

According to The Wall Street Journal, revisions under the American Taxpayer Relief Act have forced divorce attorneys and tax accountants to cautiously calculate divorce agreements.

Per this revision, single taxpayers with income exceeding $400,000 and married taxpayers with income exceeding $450,000 will see an increase in taxes.

Because of this increase, tax filers should evaluate alimony, child custody, child support, stock portfolios, property transfers, pension plans, executive pay packages, and other assets.

Alimony, or spousal support, is intended to correct any unfair economic effects of divorce. Alimony is deductible by the payer and reportable by the receiver.

However, the payer that deducts alimony needs to still be aware of the three-year alimony tax rule. This rule applies if there is a $15,000 decrease in payments in the third year or if the payments for the second or third year are considerably less than the first. If either occurs, the payer may have to pay taxes for it in the future.

This rule does not apply if alimony payments were made pursuant to a temporary order, if the ex-spouse dies, or if the ex-spouse remarries prior to the end of the third year.

Child support cannot be deducted or reported as income. However, child expenses can be deducted.

Per an article by Cordell & Cordell Principal Partner Joseph Cordell, the custodial parent has the right to claim a child as a dependent unless the divorce agreement indicates otherwise. “Custodial” is considered the parent that has the child more than one-half of the year.

If custody is shared, then the parent paying the child support can claim the child as a dependent. If neither pays child support, then the parent that earned the most income can claim the child.

The revision of the American Taxpayer Relief Act allows a new 3.8% Medicare surtax on capital gains, dividends, and other investment income exceeding $200,000 of adjusted gross income. Because of this, advisers may hold out for bigger shares of investment portfolios rather than allowing a 50-50 split.

Remember, any property transferred in a divorce cannot be deducted.

Divorcing couples should also consider their tax filing status. It may be financially beneficial for couples to file “married, filing jointly” if their divorce began before the end of the year, even if they’re living separately.

If you are facing a divorce and would like to speak to an attorney regarding tax questions, please contact Cordell & Cordell to discuss your rights.

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