If there’s one sure thing in divorce, it’s taxes
While many people may not realize it, a divorce raises multiple tax concerns both during the process itself and in the long term. Oftentimes, this complex process can become even more troublesome for those in the middle of a divorce or for people filing during the first tax year after a marriage has ended. While each case brings with it its own unique marital estate, there are a number of key reoccurring issues individuals should be aware of.
Exemptions for Children of Divorced Parents – When parents no longer live together, they frequently want to know who gets to claim the dependent child exemption. First, parents should check to see if there is a court order specifying which parent may claim the exemption(s). The Delaware Family Court has held that the dependency exemption is part of the marital estate and may be divided as part of a divorce. If there is no court order, the IRS has specified that a child who qualifies to be claimed as a dependent may typically be claimed by the parent who has primary placement (the most overnights) of that child during the calendar year. If the child spends an equal number of overnights with each parent, then the parent with the higher adjusted gross income is allowed to claim the dependent child. If, either by court order or agreement, the custodial parent is not claiming the dependent child, he or she will need to complete a written declaration (Form 8332) waiving the deduction. That form should be completed and provided to the non-custodial parent prior to filing.
Alimony/Spousal Support – Alimony/spousal support may be deducted from a payor’s income and included in the recipient’s income. To be considered alimony/spousal support for these purposes the payment must meet seven criteria: (1) the payment is in cash, check or money order; (2) the payment is received by or on behalf of the recipient spouse under a divorce or separation instrument; (3) the instrument does not state that the payment is not deductible by the payor and includible by the recipient; (4) the payor and recipient are not members of the same household when the payment is made; (5) the payor is under no obligation to make any payment after the death of the recipient; (6) the payor and recipient may not file joint tax returns with each other; and (7) the payment is not fixed by the divorce or separation instrument as child support. Alimony can be complicated to classify so former spouses who wish to have payments considered alimony for tax purposes should work with their tax adviser(s) and attorney to ensure that all the necessary prerequisites are satisfied.
Legal Fees – Legal expenses may be deductible as miscellaneous itemized deductions, subject to the two-percent-of-adjusted-gross-income floor if they are paid or incurred for the management, conservation or maintenance of income-producing property or for the production of income. Therefore, expenses attributed to producing or collecting alimony may be deductible.
Additionally, there are many tax issues that may arise in divorce — both on large and small scales. Divorced or divorcing spouses would benefit by consulting with tax advisers and legal counsel early in the process to ensure that they are well informed with regard to their specific questions.
Leslie B. Spoltore is a partner with Fox Rothschild LLP and a member of the Family Law Department. She can be reached at email@example.com or (302)-622-4203.