Tag Archive for: tax planning

Consider the tax implications of Wisconsin divorce

It seems natural to consider the tax consequences of financial decisions that we make, but many people overlook the fact that divorce involves making many financial decisions. Unfortunately, that often leads them to overlook the tax implications of their divorce agreement.

Whether you and your spouse are in agreement about nearly everything, or you are involved in a contentious battle, one thing is the same: your divorce will probably impact your taxes. It is important to consider the tax consequences of your divorce so that you can create a fair marital property settlement.

The following are some specific tax sensitive areas that should be considered by people who are considering divorce:

  • Alimony: Did you know that you can deduct alimony that you pay to a former spouse from your taxes? You must meet certain criteria, but this knowledge can make the lessen the impact of needing to pay alimony.
  • Qualified Domestic Relations Order, “QDRO”: A QDRO is a court order that will allow a spouse or former spouse to receive the benefit from the other spouse’s retirement account. Such amounts are included in income for tax purposes, so the receiving spouse must count the payments as income.
  • Divorce costs: Most of the legal fees and court costs for divorce are not deductible. However tax advice and legal fees to acquire alimony may be deductible, so it is a good idea to have a clear breakdown of the amounts you paid in your divorce.
  • Community Property: Wisconsin is a community property state. This means that there are special rules for determining the couple’s income after a divorce.

As you can see, the tax implications of a divorce are rather complex. Wisconsin couples who are considering a divorce, should consult with an experienced family law attorney who can walk them through these issues.

Source: Central Valley Business Times, “Tax provisions for 2011 regarding separation and divorce,” Alan Shattuck, Aug. 10, 2011

Divorcing couples must consider federal income tax implications

When a Wisconsin couple decide to divorce, most of the legal issues to be resolved will be governed by Wisconsin state law. But there also are federal income tax implications that should not be overlooked. Some advanced planning will be required to ensure that there are no surprises for either ex-spouse at tax time.

The first area of concern relates to the deductibility of alimony payments versus child support payments. If a divorce decree designates a payment as alimony, it is deductible by the person making the payment and taxable to the recipient. With child support payments, however, this is not true. Another issue relates to exemptions for dependents. The parent with child custody for the majority of the year generally is entitled to the exemption but may waive it in favor of the noncustodial parent.

Another consideration is how the timing of a divorce will affect tax filing status. If a divorce is finalized before year-end, each ex-spouse must file their federal income tax returns as unmarried individuals. If a couple wants to avoid the “marriage penalty,” it may be to their benefit to finalize their divorce before the end of the year.

There are other tax implications with respect to property received and then sold in a divorce settlement, the sale of the marital home, benefits in retirement plans or IRAs, and life insurance policies. An experienced divorce attorney can advise as to the tax implications that arise at the end of a marriage. The attorney also can help make sure a divorce settlement accurately reflects the parties’ intentions with respect to tax and other financial matters.

Source: The Willits News, “TAXES & FINANCES: Watch for tax angles in divorce agreements,” Jim Angell, Nov. 7, 2012

Filing taxes following divorce

Like many Wisconsin residents, you may view tax preparation as an unpleasant chore. But if you recently have divorced or are now going through divorce, you may find yourself facing new challenges this tax season. Things you previously took for granted, like your filing status and dependent deductions, may prove fertile grounds for confusion. Here are a few things you need to know when preparing your taxes after a divorce.

One area of confusion may be the appropriate tax filing status to use. The relevant date is December 31. If you were still married on that date, you must file either as married filing jointly or married filing single. If your divorce was final by December 31, you may file as head of household, provided you meet some specific requirements relating to your living arrangements during the tax year, or as single. There may be tax advantages to filing as head of household, so ask your attorney or tax advisor if you meet the requirements.

Another source of confusion is dependent deductions. Unless the former spouses reach an agreement to the contrary and execute an IRS Form 8332, the deduction belongs to the parent with whom the children resided for more than half the year. Note that if you pay child support, the payments you make are not deductible.

While you may be taxed on alimony payments that you receive, any property that is transferred to you pursuant to the terms of a divorce is not taxable, either as income or as a gift. The property retains its original tax basis, which you will use to calculate any taxes owed when you later sell or dispose of it. Given the potential tax implications of divorce, your best bet may be to consult with a qualified attorney or tax advisor before you file.

Source: Huffington Post, “Preparing Your Taxes In The Year Of Divorce,” Kathleen B. Connell, March 21, 2013

Don’t forget about IRS when deciding divorce agreement

The IRS has some very interesting rules when it comes to reporting the income and assets of divorcing couples. To make it even more complicated, those rules are different in community property states like Wisconsin.

The first thing to know before you check the “married” or “single” box on your tax return is that the IRS wants to know what your marriage status was on Dec. 31. If your divorce became final on Jan. 1, you must check the married box. If you live in Wisconsin, the state treats both incomes as community property and you may have to include part of your spouse’s income as your own for the part of the year you were still married.

You and your ex-spouse must also decide who is going to claim head of household – and take advantage of the greater deductions – for the part of the year that you were married. Generally speaking, if you paid for more than half of the housing costs for the year, and/or lived on your own for more than six months, and/or the children lived with you for more than six months, you can claim head of household.

You must also decide who is going to claim the tax write-off for the children. Usually the parent with whom the children live with the majority of the time will take the write-off. If there is shared parenting time and joint custody, some couples take turns claiming the children every other year.

Keep in mind when determining and agreeing to alimony and child support payments that alimony is deductible by the payer and must be claimed as income by the payee. Child support is neither of those things so you must be careful how you describe certain payments in the divorce decree.

When dividing assets and property, the IRS can hit you unexpectedly. If you are awarded part of your former spouse’s retirement account or 401(k) it’s a good idea to roll over that money into a retirement account of your own so you do not have to pay penalties or fees on that money.

To avoid paying capital gains or losses on a property transfer you must complete the deal within a year of the divorce date unless the event is specifically detailed in the divorce agreement. In that which case you have up to six years for any property transfers.

Source: dailyfinance.com, “Don’t Let Divorce Destroy You at Tax Time,” Dan Caplinger, July 23, 2012

Tax Considerations When Preparing for Divorce

Although taxes may not be the first thing on the minds of many people going through a divorce, divorce has significant tax consequences that are worth considering.

Firstly, your marital status on December 31 determines a taxpayers filing status for the year. If you are divorced as of December 31, then you will generally be considered single for that year for tax purposes. If you are married as of the end of the year, you either will be considered as married filing jointly or married filing separately. Generally, the most beneficial classification is married filing jointly. Because of the way the tax code operates, it can often be financially beneficial to wait until the new year to seek a divorce.

Secondly, children are another important tax consideration. In order to determine child tax credits, tax forms ask about the number of children who lived with you during and after a divorce or separation. Most of the time, the custodial parent is entitled to child tax credits. However, divorce decrees can specify that a noncustodial parent can claim the tax deduction for the children. Depending on the income of the spouses, this can be beneficial for both divorcing parents.

Lastly but importantly, the tax code treats alimony and child support very differently and it is important to consider the distinction between the two when structuring a divorce settlement. Generally, child support is not considered to be taxable income nor is it a deductible expense. This means the spouse who pays child support cannot deduct this from his or her income, and the receiving spouse does not pay taxes on child support received. Alimony is deductible for the paying spouse, and the spouse who receives it will be taxed on the amount received.

Source: Personal Finance Bulletin, “Divorce and Income Tax: Untying the Knot and Counting the Cost,” Susie Bayer, 1/6/2011

Divorce and income taxes in Wisconsin

We are all used to tax day being April 15. But this year, the federal tax day is April 18 because a Washington D.C. holiday will many keep government offices closed on April 15. Even with tax day delayed three days, many of our readers have questions about how divorce can affect their income taxes.

Divorce can have a tremendous effect on income taxes, and some of the most impactful items in a divorce may not be obvious to the untrained eye. Because of this, it is very important to work with an experienced family law attorney who can tailor divorce documents to your specific situation. However, there are some tax and divorce basics we would like to share with you.

In many of the divorces we handle, the issues of child support and alimony come up. Many divorcing spouses understand that child support is a payment from one spouse to the other meant to pay for the costs of raising a child. Similarly, alimony is payment from one spouse to the other to help the receiving spouse maintain his or her standard of living after the divorce. In some people’s minds, this might make alimony and child support relatively interchangeable.

Nothing could be further from the truth, especially from a tax perspective. This is because of the way the tax code treats alimony and child support. Child support is considered tax neutral. This means that the spouse who pays child support cannot take the amount paid for child support as a deduction. On the other side of that coin, the spouse receiving child support will generally not be required to pay income taxes on it.

Alimony is different. If certain conditions are met, alimony is deductible for the spouse who pays and the spouse who receives will generally pay taxes on it. In a high assets divorce, the difference between child support and alimony could amount to thousands of dollars at tax time.

Source: Time Magazine, “Divorce and Taxes: Five Things You Need to Know,” Kelly Phillips Erb, 4/6/2011