By John J. Stockdale
There are many complex tax questions that come up when a person divorces. It is impossible to address all of them without knowing the specific facts in each case. However, the simple answers to some general questions that almost always come up are listed below. Each situation is almost always more complicated, however, and you should always talk these matters over with your legal counsel and CPA to get the answer for your specific situation. These answers will only give you a general idea of what is going on.
Do I have to pay tax on money and property I receive in a divorce settlement? Is money I pay to my ex-spouse tax deductible?
If a payment qualifies as alimony under federal tax rules, the paying spouse deducts it and the receiving spouse reports it as income. If a payment is child support, it is not deductible by the payor and is not taxable income to the payee. If a payment is property settlement, there is no immediate tax consequence on the payment. If the payment isn't money, though, there may be a capital gains tax later when the property is sold. For example, the recipient of the home generally wouldn't pay tax on that right away but might have to pay tax when the house is later sold.
Can I deduct my legal and accounting expenses for the divorce?
Generally, you can't deduct these expenses. But the part of the fees related to obtaining a payment of alimony is deductible. Your accountant and attorney should break this out for you.
I get a payment from my spouse's pension plan on retirement. Is that taxable?
Generally there is no tax right away but when you do get payments they will be taxable just as if they were you own pension.
I am getting a payment from my former spouse's IRA. Is that taxable?
If you are less than 59 and you don't "roll the payment over" into your own IRA, it will be taxable. If you roll it over into your own IRA, its only taxable when you start to withdraw it under the normal rules. If you are 59 or older, this is also generally true but the rules get more complicated. See your CPA for your options.
I am making payments for my ex-spouse as a result of the divorce decree for items like medical expenses, rent and tuition. Are these deductible?
If these payments meet all of the other rules to qualify as alimony they are deductible by the paying spouse and income to the receiving spouse.
I am making payments on a life insurance policy and my ex-spouse is the beneficiary. Is that deductible?
If the ex-spouse owns the policy, its alimony - deductible by the paying spouse and income to the receiving spouse. This isn't true if the ex-spouse doesn't own the policy though.
What is my filing status and why do I care?
A filing status is an important factor in how much tax you pay. Joint is better than Head of Household and that is better than Single. Generally, divorced people who are not remarried file as single. However, if a dependent lives with you most of the year, and you provide most of the support, you may qualify as Head of Household.
I'm making house payments on the house my ex-spouse lives in. Are these deductible?
If your spouse owns the home and you are making the payments, the payments are deductible by you and they are income to the recipient provided they otherwise qualify as alimony.
If you and your ex-spouse still own the home jointly, it gets even more complicated. Half of the mortgage payments can be deductible as alimony if they otherwise qualify. The other half is treated as a regular mortgage payment and you might be able to deduct a portion if you are itemizing deductions. Property tax and insurance deductibility depends on the legal form of ownership. You have to talk to your CPA or attorney about it.
Can I claim a dependency deduction for my child?
Usually, claiming a dependency deduction reduces your taxes. As a general rule, the parent with custody can claim the deduction. Almost all of the time, though, this issue is specifically addressed in the divorce decree to allow shifting of the exemption from year to year or to allow the non-custody spouse to claim the exemption.
Should I be concerned about keeping records on property I get from the divorce?
If you get property in a property settlement as a result of the divorce, you might later have to pay a capital gains tax when you sell the property. You have to know what the tax cost is to figure that tax. It is very important that you get the necessary records to compute the tax cost for any item you might later sell. This is usually an issue for the house, and investments like mutual funds, stocks, and bonds as well as collectible items and valuable art work.
Share this Article: