Tax Implications of Divorce
Divorce and Taxes: Taxes Issues and Mistakes
The first financial mistake to avoid regarding divorce and taxes is failing to consider the tax impact of each asset. For instance, receiving IRAs is not the same as receiving cash, especially if you will need to withdraw funds from the IRA to cover your expenses. If you hope to keep the family home, or a vacation property, you must know the tax basis of the property, the rules related to capital gains taxes to be imposed on a subsequent sale of the property, and what, if anything, could be done to lower these taxes.
You must also consider the rules regarding eligibility and phase-out of dependency exemptions to ensure maximum available benefit.
Alimony, which is now “maintenance” under New York law, must comply with certain rules to be tax-deductible to the payor, and avoid any subsequent recapture disallowance.
Working with financial experts if necessary, your attorney must calculate your after-tax cash flow of the award or settlement offer so you’ll understand what you are really getting.
For more information about how taxes could impact your divorce settlement, speak to one of our experienced family law attorneys, or see IRS Publication 504: Divorced or Separated Individuals.
Filing Joint Tax Returns Before or During Divorce
Many married taxpayers file joint tax returns because of the financial advantages this filing status allows them. However, when married taxpayers file jointly, both taxpayers are jointly, as well as individually, responsible for the taxes and any interest or penalty due on the joint return, even if they later divorce. For example, if a stay-at-home spouse filed joint tax returns during the marriage while the moneyed spouse under-reported his or her income or made fraudulent claims, both parties may be liable for all the taxes, interest, and penalties in connection with those joint returns. This is true even if a divorce decree or judgment states that one of the spouses will be responsible for any amounts due on the previously filed income tax returns. Further, one spouse may be held responsible for all of the taxes, interest, and penalties, even if all of the income was earned by the other spouse.
Therefore, filing a joint return during the marriage or after separation presents spouses with risks that they must consider and protect themselves against. The Internal Revenue Code offers possible remedies for spouses who find themselves in the position of defending an improper or erroneous tax return, which is referred to as “innocent spouse relief.” By requesting innocent spouse relief, a joint taxpayer could be relieved of the responsibility for paying tax, interest, and penalties if their spouse has improperly reported or omitted items on their joint tax return.
Generally, the tax, interest, and penalties which qualify for relief may only be collected from the spouse or former spouse for misreporting. To qualify for innocent spouse relief, a taxpayer must meet certain, fairly strict requirements under the Internal Revenue Code. If they do meet said requirements, they could qualify for the status without being held responsible to the government to pay the taxes, penalties, and interest.
