Is April 16 National Divorce Day?

April 16 is National Divorce Day, according to Beverly Pekala, a Chicago divorce attorney who specializes in family law. She maintains that more people file for divorce the day after the federal tax deadline than any other day of the year. Money, she said, is at the heart of the problem.

That’s because on April 15, the deadline for federal tax returns to be filed, many spouses learn about a partner’s financial worth by latching onto his or her tax returns, she said. “What I’ve learned, along with everyone else in this business, is that people wait until their taxes are filed to get a divorce,” Pekala said.

“Lots of times what happens, people who want a divorce come in right after the first of the year and ask their lawyer what they should be doing? “Their lawyer tells them they need financial information and suggest they wait until their taxes are filed. Once their taxes are filed that gives us a starting place. It may not be 100 percent accurate, but it still a good place to start,” she said.

The tax information gives women, in particular, helpful information. “Even in this day an age I had a women the other day that came in to see me about getting a divorce who told me, ‘I have no clue what my husband makes,'” Pekala said. “That’s not so strange because there are still women who take care of the house and kids and their husbands take care of the bills.”

The problem today is that, with direct deposit, online checking and payments and other paperless methods of hiding money, there is no longer a paper trail for the spouse who doesn’t pay attention to the financials. she said. “I had a client who came in yesterday to see me with a joint tax return. I took a look at it and told her, ‘You didn’t tell me you owned property in Florida?’ Her reply was, ‘I don’t.’ ‘Yes you do,’ I told her, ‘according to your joint tax return.’

Then there was the woman who was seeking a divorce and learned for the first time her husband was a high roller in Vegas. “On tax returns today, gambling winnings are shown. Casinos are required by law to report an individual’s winning to the IRS,” Pekala explained. “This client’s tax return showed that her husband had won substantial sums of money in Los Vegas. I said to the wife, ‘You must have enjoyed going to Vegas?’ ‘I’ve never gone to Vegas. I didn’t know anything about my husband having been there before,’ she told me.”

Ginita Wall, director of the Women’s Institute for Financial Education in San Diego, Calif., said Pekala’s comments ring true with her. “Oftentimes I’d find that people who were trying to hid financial information would get an extension and delay filing their tax returns until Oct. 15 to avoid having to produce the damning evidence.”

When an I.R.S. media relations spokesman in Washington, D.C., was asked about the divorce rate increasing the day after the tax deadline, he was clueless. “It’s not something we track,” he said.

He wasn’t the only one flummoxed by Pekala’s opinions. Elizabeth Lehane, a divorce financial planner and tax consultant from Oakdale, N.Y., said, “I’ve been in the financial planning and tax business for 28 years, and April 16, the day after taxes are due, means nothing to me as far as an influx in divorces are concerned.”

{Asked whether she felt, after 25 years as a divorce lawyer she had seen it all when it came to marital relations, Pekala said, “I woke up today and looked on Youtube and discovered someone had made a movie about their divorce. I knew then I hadn’t seen it all.”

Source: Divorce360.com

Life Events Can Cause Problems With the IRS

Did you know that changes in your lifestyle could affect your taxes? When these changes happen, you will need to make adjustments to avoid creating IRS Problems.

Have you recently gotten married? If you have changed your name, you will need to notify Social Security to get your name changed on your card. You will also want to check out community property issues.

Have you recently divorced? Again, if you have a name change, make sure you contact Social Security. You also need to be aware of innocent spouse relief especially if your ex-spouse has IRS Problems. There are child custody tax issues, alimony issues, and community property issues you need to be aware of.

If you have had a change of address, it is important to notify the IRS so you will continue to receive its correspondence. Use Form 8822 (Change of Address) for this notification. If you fail to do this, you might miss a correction notice, an audit notice, or notification of asset seizure. Remember to keep track of your moving expenses, as these may be deductible.

Have you had a child recently or adopted a child? You will now be able to receive child tax credit. Also, did you know you are allowed education credits?

A change in jobs or loss of a job will also affect your tax return. If you work in a job that allows you to receive tips, these need to be reported. If you use your home or car for business purposes, there are specific allowances for these. You will also want to check into cafeteria plans and medical savings accounts.

Have you become a first time homeowner or have you sold a house recently? Both of these processes will give you added tax allowances.

If your life has been affected by a disaster or theft, you may be able to receive tax relief. People with disabilities have specific allowances that apply to them.

If you have retired recently, your IRS status has changed. You will want to check out the allowances you are now able to take.

If you have experienced IRS Problems in the past and have chosen to file for bankruptcy, this will change how you prepare your taxes.

Source: IRS Problem Solver blog

Tax Deductibility of Payments in Divorce Cases

One of the most frequently overlooked areas of family law is that of tax consequences.  Many family law practitioners do not fully understand the in’s and out’s of the applicable tax laws, which can result in their clients having unwanted “surprises” down the road.  Alan Pearlman of the Chicago Family Law Blog recently published the following article, which does a great job of analyzing and explaining the major tax issues for property division, child support, and alimony that divorcing parties should consider.

Prior to filing for divorce, various federal tax considerations should be reviewed due to their potentially profound implications. Among the major issues commonly covered in a divorce decree or agreement are: alimony, sometimes referred to as “spousal” or “separate maintenance” support; division of property; and child support. Each has its own tax treatment and implications.

Division of Property

Most divorces involve a division of the property owned by the couple. Such a division of property is not usually a taxable event, i.e., neither owes taxes nor gets a deduction from income because he or she receives certain property as a result of the divorce.

There are, however, tax implications following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received such property (pursuant to a divorce) to pay taxes in connection to that property.

Personal and real property have a “basis” for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sales price exceeds the basis is called “capital gain.” Capital gain is usually taxable at special rates. Thus, when property distributed pursuant to a divorce decree is subsequently sold by the receiving spouse, the receiving spouse may be required to pay taxes on the proceeds of the sale.

For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower basis than the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax.

On the other hand, under tax law applicable at the beginning of 2004, the first $250,000 (for individuals) or $500,000 (for couples) of the taxable gain on the sale of a qualifying personal residence is exempt from tax. In light of these tax issues, selling the house before the divorce, then dividing the proceeds, might make more sense.

Child Support

The parent who is granted custody of the child or children from the marriage, usually receives a set amount of money per month as “child support.” Child support payments are not includable in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments.
If the written agreement or divorce decree orders both child support and alimony and the spouse making the payments pays less than the required total amount, for tax purposes, the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as alimony.

Alimony or “Spousal Support”

In general, for federal income tax purposes, alimony and “separate maintenance payments” are “deductible” from the income of the spouse paying and includable in income for the recipient. “Deductible” for federal income tax purposes means it is subtracted from a taxpayer’s gross income before taxes are calculated, resulting in lower taxes. Taxpayers with a threshold amount of deductions must file a particular form with the IRS when paying income taxes and list such deductions.

Between the time a couple separates and a divorce decree is granted, one spouse may pay money for the support of the other spouse. These payments are deductible as long as they are made pursuant to a decree, court order or a “written separation agreement.” In order for alimony payments to be deductible, federal tax laws and regulations require the following:

• The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed
• The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony
• The spouses do not file a joint return with each other
• The spouses are not members of the same household when the payments are made, if they are legally separated under a decree of divorce or separate maintenance – separation within the family home is not sufficient
• There is no liability to make the alimony payments after the death of the recipient spouse – if part of the payment amount continues after death, that portion is not deemed alimony, and if all of the payment continues, none of it is alimony
• The alimony payments are not treated as child support

Source:  “Deductibility of Divorce-Related Payments” by Alan Pearlman, published at his Chicago Family Law Blog.

 

Source for post: South Carolina Family Law Blog

Common Tax Questions

There are many complex tax questions that come up when a person divorces. It is impossible to address all of them without knowing the specific facts in each case. However, the simple answers to some general questions that almost always come up are listed below. Each situation is almost always more complicated, however, and you should always talk these matters over with your legal counsel and CPA to get the answer for your specific situation. These answers will only give you a general idea of what is going on.Do I have to pay tax on money and property I receive in a divorce settlement? Is money I pay to my ex-spouse tax deductible?If a payment qualifies as alimony under federal tax rules, the paying spouse deducts it and the receiving spouse reports it as income. If a payment is child support, it is not deductible by the payor and is not taxable income to the payee. If a payment is property settlement, there is no immediate tax consequence on the payment. If the payment isn’t money, though, there may be a capital gains tax later when the property is sold. For example, the recipient of the home generally wouldn’t pay tax on that right away but might have to pay tax when the house is later sold.

Can I deduct my legal and accounting expenses for the divorce?

Generally, you can’t deduct these expenses. But the part of the fees related to obtaining a payment of alimony is deductible. Your accountant and attorney should break this out for you.

I get a payment from my spouse’s pension plan on retirement. Is that taxable?

Generally there is no tax right away but when you do get payments they will be taxable just as if they were you own pension.

I am getting a payment from my former spouse’s IRA. Is that taxable?

If you are less than 59 and you don’t “roll the payment over” into your own IRA, it will be taxable. If you roll it over into your own IRA, its only taxable when you start to withdraw it under the normal rules. If you are 59 or older, this is also generally true but the rules get more complicated. See your CPA for your options.

I am making payments for my ex-spouse as a result of the divorce decree for items like medical expenses, rent and tuition. Are these deductible?

If these payments meet all of the other rules to qualify as alimony they are deductible by the paying spouse and income to the receiving spouse.

I am making payments on a life insurance policy and my ex-spouse is the beneficiary. Is that deductible?

If the ex-spouse owns the policy, its alimony – deductible by the paying spouse and income to the receiving spouse. This isn’t true if the ex-spouse doesn’t own the policy though.

What is my filing status and why do I care?

A filing status is an important factor in how much tax you pay. Joint is better than Head of Household and that is better than Single. Generally, divorced people who are not remarried file as single. However, if a dependent lives with you most of the year, and you provide most of the support, you may qualify as Head of Household.

I’m making house payments on the house my ex-spouse lives in. Are these deductible?

If your spouse owns the home and you are making the payments, the payments are deductible by you and they are income to the recipient provided they otherwise qualify as alimony.

If you and your ex-spouse still own the home jointly, it gets even more complicated. Half of the mortgage payments can be deductible as alimony if they otherwise qualify. The other half is treated as a regular mortgage payment and you might be able to deduct a portion if you are itemizing deductions. Property tax and insurance deductibility depends on the legal form of ownership. You have to talk to your CPA or attorney about it.

Can I claim a dependency deduction for my child?

Usually, claiming a dependency deduction reduces your taxes. As a general rule, the parent with custody can claim the deduction. Almost all of the time, though, this issue is specifically addressed in the divorce decree to allow shifting of the exemption from year to year or to allow the non-custody spouse to claim the exemption.

Should I be concerned about keeping records on property I get from the divorce?

If you get property in a property settlement as a result of the divorce, you might later have to pay a capital gains tax when you sell the property. You have to know what the tax cost is to figure that tax. It is very important that you get the necessary records to compute the tax cost for any item you might later sell. This is usually an issue for the house, and investments like mutual funds, stocks, and bonds as well as collectible items and valuable art work.

Source for post: Divorce Online

Understanding the New IRS Rules for Claiming Dependents

Inasmuch as tax day (cue boos and hisses) is approaching, I figured that we can’t discuss often enough the new IRS rules pertaining to claiming dependents. Bankrate.com has posted this fairly thorough, and informative, discussion of the new rules and how they might apply in various situations.

Roses, Candy and Taxes: Tax Effects of Marriage, Divorce Life Changes Can Have Major Tax and Financial Implications

Whether you’re tying the knot or severing the tie, Valentine’s Day is a natural time to examine the tax implications of marriage and divorce. H&R Block offers these tax tips if you’re considering one of these life changes.

More than just wedding gifts and thank you notes, marriage also means planning for a joint financial future, including how the couple’s tax situation has changed: Marriage means choices.

The IRS allows married couples to file using the “married filing jointly” or “married filing separately” status. Each has advantages that can be difficult to sort out. For example, if you claim medical expenses or other itemized deductions that are limited by your adjusted gross income, filing separately may be the way to go. But if you want to claim most tax credits or deduct your IRA contribution, you’ll probably need to file jointly. Consult your tax professional to determine the right choice for your first time filing together.

Social Security numbers don’t change, but anyone who has changed their last name will need to apply for a new Social Security card. If the name and number don’t match, the IRS might delay processing of the return, which means a refund could take longer than usual to arrive.

Marriage also means adjusting retirement savings. Besides changing filing status on an employer’s 401(k) account, newly married taxpayers also should consider increased limits for tax-deductible IRA contributions. If the couple’s income meets certain limits, they could qualify for more of a deduction. In some scenarios, one spouse also may “borrow” from the other’s earnings to meet the limits.

Inform the IRS of a new address. If the IRS does not have the correct address on file for a newly married couple, it could take longer for a refund to arrive. Taxpayers shouldn’t count on mail to be automatically forwarded and should consider filing Form 8822 to inform the IRS.

Divorce also can change a taxpayer’s financial situation. The best advice is to understand the divorce agreement and its terms, especially key components that could complicate a tax return.

Alimony is taxable and deductible. The person who provides alimony can claim the payments as a deduction, while the person who receives it can avoid a large end-of-year tax bill by paying estimated taxes during the year. Unlike alimony, child support is not deductible or taxable.

Who claims children? The parent who has custody of a child usually can claim the child as a dependent. However, with the custodial parent’s consent, the parent without custody can claim the child. (The custodial parent may still be able to claim certain tax benefits related to the child, including head of household filing status, the Earned Income Tax Credit, and the child-care credit.)

Who is a head of household? There are several factors for determining the head of a household. A few include being considered “unmarried” on the last day of the year, having children or other dependents who live with you, and paying more than half the cost of providing a home for dependents. Taxpayers should consult with a tax professional to determine if they qualify for head-of-household status.

Divorce, annulment and legal separation are considered the same by the IRS for tax purposes. The way a tax return is affected by the situation depends on how the decree is worded, and in cases where state and federal law differ, the IRS will side with the federal government.

Source for post: California Divorce and Family Law

Claiming Dependents – Its Best to Know the Rules

Grant Griffiths posted the following helpful information at his Kansas Family and Divorce Lawyer Blog concerning the rules that apply when divorced or separated parents want to claim children as dependents on their federal income tax returns:

The IRS makes the assumption that the custodial parent is entitled to the dependency deduction — period. The only exception is when the custodial parent releases the claim by signing Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, or by signing a similar statement.
If the IRS-provided form is not used, the similar statement must contain the same information — the name of the child(ren), the tax year to which it applies, and the name and social security number of the parent releasing the claim.
The IRS will not accept pages of the divorce decree that state that the noncustodial parent is entitled to the dependency exemption as satisfaction of the waiver requirement.
In the event the custodial parent refuses to sign the waiver and claims the children, the noncustodial parent cannot claim the same children. If both parents claim the same children, the IRS will promptly send a notice stating there has been an error.
Each parent’s refund will be adjusted to reflect the denial of the dependency exemptions until the matter is settled. If the custodial parent still refuses to release the claim to the other, the only recourse is to go back to the judge that issued the original divorce decree and have the ruling enforced.
Until that is done, the IRS will award the dependency exemptions to the custodial parent provided that parent can prove the children lived in his or her home for more than one-half the year.

Thanks to Grant for this post at the Kansas Family and Divorce Lawyer.

Source: Postcrescent.com

Dependent Deductions for Non-Custodial Parents – Dot the “I’s” and Cross the “T’s”

The Family Law Taxation Blog a few days ago published this post about a recent United States Tax Court decision concerning the ability of a non-custodial parent to take a tax deduction for a dependent child who was not living with him. The parents, who were not married and so were not divorced, had no agreement concerning who was entitled to claim the dependent child on their tax return. The tax court disallowed the non-custodial father’s claimed deduction because he had not filed with his return IRS form 8832 or other similar document advising that no other person wqas claiming the child as a dependent (in fact, the child’s mother DID claim the child as a dependent). There are mutliple morals to this story. First, you absolutely must address this tax issue, and must document your agreement with your spouse or non-spousal parenting partner. Second, you MUST be sure to file all the necessary forms and information with the IRS. Tax practice is complicated and getting more difficult. If you have any questions, doubts or concerns, ask your lawyer, accountant, or other tax adviser. Call the IRS, but ask someone if you are not sure.

Source for post: Family Law Taxation, which published this post. Thanks also to Jeffrey Lalloway of the California Divorce and Family Law blog for this post on the subject.

Can You Deduct legal Fees from a Divorce on Your Taxes

At the turn of the new year, its inevitable that thoughts turn to taxes eventually. An often asked question is whether legal fees are deductible on your income taxes and, specifically, whether legal fees incurred in connection with a divorce can be deducted. Diana Skaggs at the Divorce Law Journal has a very informative post on this subject.

Tax treatment of stock options in divorce

The distribution and tax treatment of stock options in the course of a divorce can be a very confusing subject. The Tax Prophet has published this newsletter that helps explain how options that are transferred from one spouse to another are treated for tax purposes.