We receive many questions from our divorce clients concerning tax issues. I am going to summarize some of the tax-related divorce questions.
When marital assets are distributed pursuant to a judgment of divorce there is generally no gain or loss on the transfer of assets incident to a divorce provided the transfers occur at the time of the judgment of divorce. Your accountant may be able to deduct some of the legal fees which you incur in the divorce action to the extent that the fees relate to tax advice, fees to determine or collect maintenance and legal fees to determine the estate tax consequences of the divorce.
As a general rule, maintenance payments (support payments for a spouse) are taxable as ordinary income to the recipient and deductible by the payer.
There are certain requirements under the Internal Revenue Code (Section 71) which must be complied with. Child support is never taxable. It is important to consider the tax consequences concerning the sale of a marital residence since an individual is entitled to $250,000.00 of capital gain exclusion while a married couple is entitled to $500,000.00.
As to filing status, the Internal Revenue Service determines your marital status as of December 31st of each year. If you are divorced as of December 31st you must file as a single taxpayer or head of household for that year and you cannot file a joint return with your ex-spouse.
As a general rule, the custodial parent is entitled to claim the children as an exemption, however, this can be changed by written agreement between the parties. It is possible to distribute retirement assets pursuant to a judgment of divorce without incurring any taxes. Often it is necessary to arrange for the court to issue a qualified domestic relations order (QDRO) so that retirement assets can be distributed between divorced spouses without creating a taxable event.
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S. Russ DiFazio