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FAQ: Tax Law

Does a Divorce Raise Any Federal Income Tax Issues?

The first tax issue that a person may want to consider when deciding to divorce is how spousal support payments (also referred to as alimony or separate maintenance payments) are treated for tax purposes. If an individual will be paying spousal support to his or her ex-spouse, the amount of the payments can be deducted when computing adjusted gross income. The payee spouse must include alimony payments in his or her gross income. A payment qualifies as alimony or separate maintenance if:

  • The payment is in cash
  • The payment is received by a spouse pursuant to a divorce or written separation agreement
  • The divorce or separation agreement does not designate the payment as not being alimony for tax purposes
  • The payor spouse and payee spouse are not members of the same household after a divorce or legal separation at the time the payment is made
  • The obligation to make payments ends when the payee spouse dies
  • There is front loading of the payments, the excess payments are recaptured in income

Other types of payments may be considered alimony so that they are deductible by the payor spouse and included in the income of the payee spouse. Generally, the payment of a mortgage by a payor spouse on the payee spouse’s residence is treated as alimony, unless the payor owns the house. If one spouse pays the medical expenses of the other either directly or to a third party, the payment may be treated as alimony and be deducted by the payor.

A divorcing couple that has children might be concerned with how child support payments are treated for tax purposes. A “fixed” child support payment is not deductible by the payor spouse, nor is it included in the income of the payee spouse. If an amount of money is designated as child support in the divorce or separation agreement, then it is a fixed payment.

Other tax issues for divorcing parents are which parent can claim an exemption for the child or children and which parent can claim deductions for certain child care expenses. With some exceptions, the parent who has custody for the majority of time during the year is generally considered the custodial parent and can claim an exemption for the child. A taxpayer is entitled to a tax credit of $1000 for each qualifying child. This amount is reduced when the taxpayer’s modified adjusted gross income exceeds certain threshold amounts. A qualifying child means a child who is not over 17 years old, for whom a dependency exemption is permitted and who has a relationship with the taxpayer as set forth in Section 152(c) of the Internal Revenue Code (IRC). Either parent may deduct a child’s medical expenses if they exceed 7.5% of the parent’s adjusted gross income, regardless of which parent provides most of the support for the child. The IRC provides a credit for childcare expenses. A parent who has custody and incurs childcare expenses for a child under the age of 13 can claim this credit.

How transfers of property are treated for tax purposes is another concern that a divorcing couple may have. Under Section 1041 of the IRC, when one spouse transfers property to the other spouse, neither the gain nor loss is recognized for tax purposes. This nonrecognition rule applies regardless of whether the transfer was made in contemplation of divorce. If a divorcing couple sells their home and splits the proceeds, the parties must plan so that they do not recognize gain.

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