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Divorce and Taxes

Divorce is painful and often a difficult and complicated process in which your family is irreparably broken apart and everything you own is divided up between you and your ex-spouse. Your life is shattered, each detail of property division re-opens old wounds, and then, of course there are the children to consider. The last thing most people think about in this situation is how it will affect are their taxes.

The IRS, however, still considers itself to be your number one priority and will have no sympathy for your psychological and emotional distress, or the fact that you were thinking about things that were obviously more meaningful and important to you than making sure the government gets its fair share of the cash during the fallout.

The tax ramifications of divorce can be exceptionally complicated. You should consult with your attorney on how to best handle tax issues and may need to consult with an accountant and an experienced tax attorney, both of which your divorce lawyer should be able to recommend, if you do not have know of any.

Filing jointly or separately
The timing of your divorce will affect whether or not it is appropriate to file jointly or separately. When married couples file jointly, both spouses can be held responsible, individually, for the entirety of the taxes, penalties and interest due. If your spouse has made a mistake or committed fraud on a joint tax return, you can be held responsible for the entire burden. On a rare occasion you may be protected by the Innocent Spouse Rule, but do not count on it.

Innocent Spouse Rule
Designed to protect married and divorced individuals from the illegal tax practices of their spouse or ex-spouse, in the event that the harmed spouse is not financially savvy and had no way to know that a mistake or fraud had been committed, the Innocent Spouse rule can be very difficult to invoke. Conditions for protection under the Innocent Spouse rule include:

  • Joint return filed for the applicable tax year
  • Substantial understatement ($500 or more) of tax attributable to the gross income, deductions, credits or basis of the other spouse
  • Spouse seeking protection must prove that he or she did not know, and had no reason to know, that such the understatement existed, when the return was signed
  • It would be inequitable to hold the spouse seeking protection liable for taxes due on the understatement

Selling the house
Capital gains from the sale of a home can be protected from taxation if the money is used to purchase another home within a certain amount of time, usually two years. In a divorce this gets complicated because it only applies to a home that is the actual residence of the seller. Once a couple has divorced it is highly unusual for both parties to make the same house their residence. If the house is sold after one party has moved out and they are to share in the proceeds, only the party still residing in the house is protected from taxation on the capital gains. Even though division of property is meant to be equitable, this tax aspect can be significant enough to be inequitable.

Support payments
Alimony, or spousal support, and child support are exact opposites when it comes to taxes. Spousal support is deductible for the person making payments and must be reported as income for the person receiving payment. Child support is reversed. It is not deductible for the person who pays, but it is not reported as income for the person who receives.

Of all “parties” involved in a divorce, the IRS will be the most relentless in pursuing its share. This is one area of a divorce, no matter how simple and amiable the divorce is, that will always require professional help.

If you are facing or contemplating divorce, contact an experienced divorce attorney, if for no other reason than to get advice on handling tax issues, today.

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