- 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 deduction of part of the
attorneys 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 person 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.
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- 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.
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- 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
dependent. "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.
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- 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.
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- 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 are accurate.
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- What happens if alimony continues after death of the recipient?
The IRS may treat it as a
property payment and you lose the
deduction.
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- Are taxes and sale proceeds split in the same proportion?
No. Taxes are debts split
according to ability to pay. Sales proceeds
are assets split 50/50 percent.
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- 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.
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- 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.
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to Questions
- Do I need a tax expert?
Yes, if you have valuable
non-cash assets such as stock options a
home or 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.
Susan has been giving tax advice to clients
for almost 20 years.
Every situation is different and the tax rules
are very sensitive to changes in the facts. If
you want to increase your chances of
qualifying for a tax deduction, please contact us.
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Internal Revenue Code Sources:
A. IRC §162(a) ordinary and necessary business expense.
S. IRC §162 business expense of a
controlled corporation joined as a party to the
divorce.
T. IRC §212(1) expense for the production or
collection of income
19. IRC §212(2) conservation of income-producing property
20. IRC §212(3) fee for tax advice
