1. Can I deduct the cost of my divorce?
Sometimes yes and sometimes no. A divorce is a personal matter and personal expenses are usually not deductible so most of the expenses will not be deductible. However, if you have a business or itemize your deductions, there are five separate opportunities for the deduction of part of the attorney’s fees, accounting fees, and other expert fees incurred incident to divorce proceedings. Some common opportunities include the following:
- Spousal Support: A person seeking spousal support or an increase can deduct the related attorney’s fees. A person seeking to reduce or eliminate spousal support paid to the other spouse gets no deduction.
- Business Expenses: Valuing and dividing a business during the divorce process is a personal expense, no deduction. However, if the cost can be an “ordinary and necessary” business expense, a deduction might be allowed.
- Tax Advice: Attorneys’ and accountants’ fees related to determining the tax consequences of support and settlement proposals is deductible by both parties.
2. What is the difference between “spousal support” and “family support?”
“Spousal support” is tax-deductible to the payor and taxable income to the recipient while child support is neither. “Family support” merges both spousal and child support into a single payment that is taxed like spousal support. This is obviously a benefit to the payor but may be a burden to the recipient. However, often it will benefit both parties because it results in a larger monthly payment but a lower after-tax cost to both parties.
3. What is the difference between the “dependency exemption” and “head of household”?
The IRS allows parents to transfer the exemption by signing Form 8332 which is then attached to their tax returns. The dependency exemption is a deduction from your gross income for each dependent child or other qualifying dependents. “Head of household” is a filing “status” that is defined by the IRS.
“Head of household” is a status that is determined by IRS criteria alone. It cannot be transferred by agreement or any other way if you do not meet the criteria. In order to meet or avoid the criteria, you must structure your visitation and support agreement to put you in or out of the status.
4. Should my settlement be based on face value or tax basis?
Both. The difference could put money in your pocket or take taxes out, but the tax basis is not considered unless the property will be sold very soon.
5. Should we file a joint return?
No, unless both spouses only have W-2 income or you are absolutely certain that every item of income and expense is accurate.
6. What happens if alimony continues after the death of the recipient?
The IRS may treat it as a property payment and you lose the deduction.
7. Are taxes and sale proceeds split in the same proportion?
No. Taxes are debts split according to the ability to pay. Sales proceeds are assets split 50/50 percent.
8. Can I pay all the alimony I owe in the first year?
Yes, but it may not be taxed as alimony. To qualify as alimony, you must make payments in more than one year. If the payments in the first three years are $15,000 more than the average of the next two years, the deduction may be denied.
9. Should I fight for the dependency exemption?
Not unless it will do you some good. Will the benefit exceed the cost of the spousal support? Alimony is a payment that qualifies under the IRS Code as spousal support.
10. Do I need a tax expert?
Yes, if you have valuable non-cash assets such as stock options home, or a business that normally would be taxable upon sale or transfer to another person or you suspect tax violations. Most family law practitioners have little or no background in business, taxation, or finance.