Tax Concerns In Divorce

Should Separated Couples File a Joint Return

In many situations, it is advantageous for married couples to file a joint return. Married filing separately is often the least favorable tax status to have. Even after separation, it is possible for married persons to file a joint return, so long as they were not divorced before the end of the year.

There are some risks of doing this. If one of the spouses is cheating on his or her taxes, or innocently makes a mistake, the other might end up owing the tax.

Who Will Get The Refund If We File Jointly?

If separated persons decide to file jointly there should be a written agreement about what happens to the tax refund. If there is no agreement, this becomes one more thing to fight about during the divorce. Even if separate returns are filed, to the extent that the tax refund was earned before the separation,  in Pennsylvania, it would be considered to be marital property, and subject to being divided during a divorce.

Will My Alimony or Support Get Taxed?

In general, alimony or spousal support is tax-deductible for the person who is paying, and taxed as income to the person receiving it. The opposite rule applies to child support: child support is neither tax-deductible, nor taxed. For this reason, most support orders in Pennsylvania are allocated: this means that the support order will say how much of what is being paid is for child support, and how much for spousal support or alimony.

Can I Take the Children as a Deduction If I Am Separated or Divorced?

Only one parent can claim each child as a dependent on their tax return. The IRS allows the parents to decide this: one parent signs an IRS Form 8332, and the other attaches it to his or her return. If they don’t agree, the IRS has a set of rules to decide who gets the deduction. In general, the custodial parent can take the deduction, defined by where the child sleeps the majority of nights. In case of a tie, the parent with the higher income takes the deduction.

Will I Be Taxed On the Value of Property Which I Receive in a Divorce Settlement?

In most cases, the answer is no: Transfers of property between spouses, as a part of a Divorce settlement, are not subject to income tax. If the property is sold at the time of the divorce, there may be a tax on the capital gain: the amount by which the property has gone up in value. And if the spouse receiving the property later sells it, he or she will owe tax on the profit at that time. Example: Sally and Joe purchased 100 shares of stock during the marriage, paying $10 per share. As a part of the divorce settlement, the shares are given to Sally. She owes no tax at the time of the divorce. If, a year later, she sells them for $20/share, she will owe capital gains tax on the profit of $10/share.

Can I Deduct My Divorce Attorney Fees?

You cannot deduct legal fees and court costs for getting a divorce. But you may be able to deduct legal fees paid for tax advice in connection with a divorce and legal fees to get alimony. You can claim this deduction only if you itemize deductions on Schedule A, and they are subject to the 2%-of-adjusted-gross-income limit.

For More Information About Divorce Taxation

See IRS Publication 504

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