Category: taxes

How Can I File Taxes While Going Through a Divorce?

How Can I File Taxes While Going Through a Divorce?

In this world, nothing can be said to be certain, except death and taxes.
                                                                                                – Benjamin Franklin

Unfortunately, the fact that you are going through a divorce does not change the wisdom of  Dr. Franklin’s quote.  Even while going through a divorce, you will still have to figure out how to file your taxes.  One of the key questions that controls how you can file is whether you were still legally married as of December 31st.  Keep in mind that any tax refund received is most likely marital property and any tax debt owed is most likely going to be considered a marital debt.  Therefore, it is in everyone’s best interest to work together to file the return in the most mutually beneficial way possible.

  • Filing Jointly:  If you and your spouse were still legally married on December 31st, you can file a joint return.  If you choose this option, you should also complete IRS for 8888 which allows you to direct funds to more than one account.  This eliminates the need to secure each other’s signature on a joint refund check.
  • Married Filing Separate:  Even if you are still married on December 31st, you can still file a separate return.  Keeping in mind the issues about marital property and debt.  However, this might be a preferable option if you suspect your spouse may be trying to cheat the government or simply will not otherwise cooperate in filing a return.  If there is a later court order or agreement, you may be able to amend an individual return with a joint return.  Be aware that you cannot amend a joint return with an individual return.
  • Head of Household:  If you are are single or legally separated as of December 31st, you may file as head of household if you have maintained the principal place of abode for the children for the entire year or you paid for maintaining the house for more than half the year.
  • Single:  If you are divorced by December 31st, you can also file single for the tax year.

As with anything tax related, you should discuss your particular situation with your tax professional to determine the best way for you to file.  Before you make any decisions about how you are going to file your tax return, you need to discuss the issue with your attorney.  You need to do this as soon as possible in your case because your attorney may need time to file an appropriate motion with the Court before the April 15th deadline hits.

Photo courtesy of John Morgan

After a Divorce, Who Gets to Claim the Children?

After a Divorce, Who Gets to Claim the Children?

For years, in the wake of a divorce, the custodial parent (what we now call the primary residential parent) always got to claim the child for tax purposes.  In fact, IRS guidelines still state that if the child resides in one parent’s home for more than half the year, that parent gets to claim the child.

However, that has changed and the rule in Kentucky has been for several years that the trial court can allocate who gets to claim the child for tax purposes.  The IRS will require that the primary residential parent sign IRS Form 8332 and also require the non-residential parent to attach a copy of the order from the trial court to his/her tax return.  If the court has specified when/how the the child will be claimed in succeeding years (i.e. alternating or even/odd years), the IRS may not make you supply these documents in succeeding years.

Things get a little more complicated when there is more than one child.  In that situation, courts have used a few different options.  Sometimes, judges will order the parties to alternate claiming all of the children just like they may do if there was only one child.  Another, and more common option, is for the court to allow one parent to claim one (or multiple children) and the other parent to claim the other(s).  When there is an odd number of children, three for example, the court will often say one parent claims one child, the other parent claims the one child, and the parties alternate claiming the third child.

An entirely different wrinkle occurs where there is a wide disparity in the relative incomes of the parties.  In that instance, it is usually a good idea to do an analysis of the relative benefits of claiming the children as a basis to argue to the court how the exemption should be allocated.  Some judges use a “70% rule of thumb” where if one party makes seventy percent or more of the gross parental income, that party will get to claim the child(ren).

Something to keep in mind is that whatever manner the court chooses to allocate claiming the children, it is not set in stone.  Most courts treat the allocation of claiming children in the same vein as child support.  In other words, it is modifiable upon a showing of a substantial change in circumstances.  This could be as simple as one child gets to the age that the parents can no longer claim him/her for tax purposes or as significant as one spouse losing or changing jobs.

Photo courtesy of Chris Tolworthy

What Is A QDRO & Why Is It So Important?

What Is A QDRO & Why Is It So Important?

Unless you have been through a divorce, you have probably never heard of a QDRO.  If you are going through a divorce and a retirement account is involved, a QDRO is extremely important.  QDRO is a term that means qualified domestic relations order.  This is a special order that is needed to divide a retirement account, such as a 401k account, while minimizing the penalties and taxes.

At its most basic, a QDRO divides a party’s retirement account in a divorce.  It may be drafted by either of the attorney’s involved in the case or by a neutral third party company.  Regardless of who drafts the QDRO, it must conform to certain provisions of the Internal Revenue Service Code, the specific rules of the retirement plan itself and the plan administrator.  Finally, it must be approved by the Court.  As you can imagine, with all of the requirements that must be satisfied, these documents must be prepared with some degree of precision.

Once the QDRO is signed by the court, the circuit clerk will mail the order to the plan administrator who will then begin the process of dividing the retirement account.  Generally, the plan administrator will do his/her best to maximize the tax benefits under the terms of the plan and the QDRO.  Again this division is done without any of the penalties normally associated with taking money out of one of these plans and thereby saving both you and your ex-spouse potentially thousands of dollars.

With a QDRO in place, one spouse will be receiving a portion of the other spouse’s retirement.  The party receiving this portion is called the “alternate payee.”  The only way to get this designation is with a QDRO, otherwise, such a distribution would be deemed an early withdrawal and subject to all of the penalties of an early withdrawal.

This brings up another point, during your divorce, you should never withdraw or borrow money from your retirement account without first consulting with your divorce lawyer.  First, you will most likely run afoul of orders of the court that prohibit such behavior.  Second, you may also be accused of dissipating (wasting) assets because you will incur penalties with the withdrawal.  Third, you will increase your tax obligations for the year.  Finally, it is just a bad idea because you are leave less money for you and your spouse to divide.  Often a retirement account is the second largest asset to divide behind the marital home.  Just like you should not start tearing walls out of the house and destroying the home’s value, you should not damage the value of the retirement account.

Obviously, QDROs are extremely important when going through a divorce.  As with most other things in a divorce, it is something you need to discuss with your family law attorney.

Photo courtesy of 401(K) 2012

The Divorce is Over. Now What?

The Divorce is Over. Now What?

The divorce is over and the dust has settled.  The court has said that you are no longer husband and
wife.  Now what do you do?  The time has come to notify other necessary people that you are divorced and take steps to change your official records and important papers.  Below is a list of some of the issues you need to deal with and people you need to notify.

  • Your Employer:  Make sure your employment records reflect your new single status.  This will require you to change your wage deductions, beneficiaries and possibly other withholdings.
  • Retirement Benefits:  This may fall under contacting your employer, but if you received a share of your spouse’s retirement, make sure you also received a copy of the qualified domestic relations order and contact the plan administrator to make sure they have everything they need to get you the benefits you were awarded.
  • Banks & Investments:  Notify banks, investment clubs, credit unions, etc. of your new single status and make sure your spouse’s name is removed from any accounts you received.  Destroy all old checks from any joint accounts.
  • Insurance:  Again change your beneficiaries.  If you are no longer required to carry certain family members on your policy, contact your company and have them dropped.  If you were covered under your ex-spouse’s employer’s plan, contact the employer immediately about COBRA benefits if you have not made other arrangements for health insurance.
  • Taxes:  Contact your tax professional to discuss your new tax status and what you need to do to prepare for the next tax season.
  • Credit Cards:  Destroy all joint cards and close the accounts or have them transferred to your name alone (or your ex’s if he/she was ordered to pay the debt).  Verify your ending balances.
  • Important Documents:  Review all deeds, titles, and other documents of ownership to make sure property is placed in the name of the person who received it in the divorce.
  • Will/Estate plan:  Review your estate plan and modify your beneficiaries and testamentary gifts accordingly.
  • Power of Attorney:  If your ex spouse had power of attorney over you, revoke it and have a new one prepared.
  • Name Change:  If you changed your name as part of your divorce, you need to have it changed on your driver’s license, the Social Security Administration, and your financial institutions.
  • Social Security Benefits:  If you were married for ten (10) years or more, you have the right upon retirement to claim the higher of your benefits or your ex-spouse’s level of benefits.  Keep a copy of your marriage license and divorce decree to show the Social Security Administration when you qualify to file.
  • Child Support:  If you are receiving or paying child support contact your local child support office to make sure they have your contact information and a case open on you.  This will ensure that you receive proper credit if you are paying or provide a way to prove that you have not received support you are owed.  If there is a substantial change in your or your ex-spouse’s financial condition, you may be eligible for a child support modification at any time after the divorce.

Finally, always keep a copy of your divorce papers in a secure location that you can readily access.  While this list is not an exhaustive list of post-divorce action steps, it will cover most issues that will or could arise after your divorce.  For more detailed information, contact your family law professional.

Photo courtesy of CollegeDegrees360

Can I Deduct My Attorney Fees From My Divorce?

Can I Deduct My Attorney Fees From My Divorce?

It is possible in some limited circumstances.

Let me preface this article by saying that I am in no way a tax expert and you should consult with your tax advisor on your specific situation.

With that being said, yes, attorney fees for a divorce can be deductible.  Attorney fees, along with other litigations costs, are only deductible to the extent that they are incurred to produce taxable income.  For example, if you incurred attorney fees to secure an award of maintenance and that maintenance award is taxable as income, which it generally is, then you can deduct a portion of your attorney fees and litigation costs.  Likewise, if you incurred attorney fees to modify a maintenance award, you may be able to deduct your fees.

Conversely, since child support is non-taxable, you can never deduct your attorney fees incurred to pursue a child support claim or modification.  However, you can always go through your local county attorney office for free child support enforcement assistance.

Other areas where attorney fees in a divorce may be tax deductible include fees incurred to secure a portion of a spouse’s retirement account, since the account payments will be taxable when they are withdrawn.  If the retirement account was generated with taxed income and is not taxable upon withdrawal, then the fees are probably not deductible.  You may also be able to deduct your fees if they were incurred to secure things like rights to patents, royalties, and other similar assets that will generate taxable income for you.

The right to deduct your attorney fees is not total.  The attorney fees can be deducted as miscellaneous itemized deductions.  Sorry, if you take the standard deduction you are out of luck.  Additionally, the fees are only deductible to the extent in which they exceed 2% of your adjusted gross income.

As you can see, this is a very complex area and I would reiterate that you should never try to deduct your attorney fees without first discussing it with your accountant.  Your accountant may want you to request a letter from your attorney to specifically designate what portion of the attorney fees were incurred to produce taxable income because such a letter or other statement will likely be required by the IRS if there is ever a dispute.  Since many attorneys move their files to storage upon completion of the case, the sooner you ask for that documentation, the better.

Photo courtesy of Ken Teegardin

How Do I File My Return If My Divorce Is Not Final By the End Of the Year?

How Do I File My Return If My Divorce Is Not Final By the End Of the Year?

Today’s article is brought to you by Tara R. Blazina, CPA with Kemper CPA Group.  We routinely consult with Tara and others at Kemper on tax, financial and business valuation matters. 
Filing status is determined on the last day of the tax year (usually December 31). A couple who has not obtained a final decree of divorce or separation by the last day of the tax year is considered married for tax purposes. There are five filing statuses, only four of which pertain to parties who are divorced or in the process of getting a divorce. Individuals who are deemed married can file as married filing jointly, married filing separately or as head of household (if certain qualifications are met). An unmarried individual may file as single or head of household.
Often times, married filing jointly will create a lower tax liability. However, both you and your spouse are jointly and severally liable for the tax liability. Married filing separately allows you and your spouse to only be liable for the tax reported on your separate tax returns, but may create a higher tax liability. Your tax preparer should be able to calculate both married filing jointly and married filing separate to identify the advantages and disadvantages of both filing statuses so that you may make the best decisions for your situation.
If you file married filing separately, you and your spouse may amend the return to change to married filing jointly for up to 3 years after the due date of the return (not the extended due date) However, if you file married filing jointly you may not subsequently amend the return to file married filing separately; except in the event of a death of either the taxpayer or the spouse. A personal representative for a decedent can change from a joint return elected by the surviving spouse to a separate return for the decedent. The personal representative has 1 year from the due date(including extensions) of the joint return to make the change. [IRS Publication 504]
In order for a married individual to file a head of household, they must be deemed an “abandoned spouse”. All of the following qualifications must be met to be considered an abandoned spouse. 
  • The individual pays more than half the cost of maintaining his or her household for the taxable year.
  • The individual files a separate tax return.
  • The individual’s household is the principal home of a dependent child for more than six months of the year (this condition is met if the tax payer is entitled to claim the dependency exemption for the child, even if they do not claim the deduction).
  • The individual lives apart from their spouse for the last months of the year.

There are many facets of a divorce that can impact your tax return. It is important to discuss all options with your tax preparer and be aware of the tax impacts of your decisions. 
Note: This information is general in nature and should not be construed as tax advice. You should always work with your attorney or tax professional to determine the tax advantages that will best fit for individual situation.