Recently in Divorce and Taxes Category

October 23, 2009

Alimony, A Tax Planning Opportunity

Federal tax rates are likely to be increased for higher income individuals. Moreover, tax planning issues are already important in Maryland. Our state's high income tax rate is added to the local rate levied by all counties with Howard and Baltimore at the highest level permitted by law. Divorce Lawyer need to keep in mind the income tax savings opportunities offered by payments that can be legitimately characterized as alimony. If alimony is paid by a higher income tax payer to a lower income taxpayer, the savings is the amount of the payment multiplied by the difference in the effective marginal rate.

There are nine tests for alimony: (1) payment must be in cash or cash equivalent, (2) the payment must be received by or on behalf of a spouse. The payment may be paid directly or indirectly, (3) the payment must be made under a "divorce or separation instrument", which includes a written separation agreement or court decree, (4) the divorce or separation instrument must not state that the payment is not alimony, (5) the parties must not be living together, although, there is an exception for parties who are "legally separated" pursuant to the Internal Revenue Code, (6) the payment must terminate on death of the payee spouse, (7) the parties may not file a joint tax return, (8) the payments may not constitute child support and (9) the payments may not be front end loaded so as to disguise a property settlement.

The difference between child support and alimony is somewhat complex. However, especially in an era of back breaking tuition for private schools and colleges, this is an area worth exploring for many higher income individuals involved in separation or divorce. Individuals who are interested in educating themselves further regarding the tax consequences of separation and divorce, should take a look at IRS pub 504 Tax Information for Divorced and Separated Individuals.

October 20, 2009

In Seperation and Divorce Who Owns a Joint Tax Refund?

As Ben Franklin reminded us "in this world, nothing is certain except death and taxes". As a Maryland Lawyer representing clients in their financial affairs arising from separation and divorce, tax issues must be kept in mind. My blog has previously alerted parties contemplating separation and divorce about the perils of filing joint tax returns. The IRS treats couples who file jointly as jointly liable for any deficiencies due on federal taxes, unless a spouse is deemed to be an "innocent spouse." In other words, the IRS can come after a spouse for the deficiency created by the other spouse. However, the rule differs for over payments on joint tax returns.

An overpayment on a joint tax return by one spouse belongs to that spouse. The IRS's reasoning is that filing a joint tax return does not create a new property interest in the spouse who did not make the overpayment.

In situations in which each spouse pays some of the tax liability, each spouse is entitled to a portion of the refund. The IRS has developed formula that considers what each spouse's tax liability would be individually and the actual contribution of each toward the joint tax liability. For anyone who wants to educate themselves about tax matters relating to separation and divorce should start with IRS Publication 504, Tax Information for Divorced and Separated Individuals.

August 16, 2009

Income Tax Issues for Divorcing Spouses

As a Maryland Divorce Attorney, I often counsel my clients on the risks involved in filing joint tax returns with their soon to be ex spouses. It is not uncommon for individuals with businesses or other complicated returns to obtain an automatic six month extension. For such individuals, October 15th becomes the filing date. Since that date is approaching, I thought it would be a good idea to discuss some related issues a spouse facing divorce might want to consider.

Spouses who are married as of the last day of the year are entitled to file a joint tax return. The advantage is that the federal tax is almost always less as applied to the combined income of the couple. Frequently, one spouse benefits more than the other from filing jointly. For example, a spouse with a lesser income might be entitled to a refund on a return filed as married filing separately. On the other hand, the spouse with the higher income would incur a higher income tax obligation by filing separately.

By filing jointly, both spouses become jointly and severally liable on the tax return. For example, if your spouse has failed to report business income or improperly claims deductions, you are equally responsible if you file a joint return. There are exceptions to the general rule of joint and several liability. However, the burden is on the taxpayer to convince the IRS that an exception applies.

While there is time before the October deadline for you to carefully review IRS rules and seek advice from your divorce attorney or tax adviser. Taxpayers who file separately can file an amended joint return for up to three years. However, if you file jointly, you cannot change that decision.