Identifying the Tax Consequences of Divorce Part 1

Cindy Best

At some point your family law client will have some basic issues regarding the tax consequences of their divorce. This material may provide you with some answers to frequently asked hypothetical questions, and may also identify some more complex issues that you may need to be made aware of. While it is important to have some basic knowledge, it is wise to advise clients to seek the advice of a tax professional.

The following is not meant as tax advice, and I have no particular expertise in tax situations. The attorney, professional, and or client should seek advice from an independent tax professional. This material should not be relied upon since every situation is different and fact specific.

Frequently Asked Questions and Important Topics

 

1.? Are my spousal maintenance payments tax deductible?

Spousal maintenance is taxable to the recipient and deductible by the payor. To qualify as spousal maintenance under IRC Section 71(b) (this IRS section is often cited in Marital Settlement Agreements), the payments must meet the following requirements:

  • Payments are required under a written divorce or separation agreement,
  • The payment cannot be designated as ?not alimony? or ?not spousal maintenance?,
  • Spouses may not be members of the same household,
  • Payments may not be treated as child support,
  • Payments must cease upon death of recipient, and
  • The parties cannot file a joint tax return

In addition, there are a few other common payments that do not qualify as spousal maintenance, such as:

  • Non-cash transfers,
  • Payments for use of property, and
  • Payments to keep up the payer?s property

It is important to note that while Arizona uses the term ?spousal maintenance?, the IRS uses the term ?alimony?.

I am not a tax professional and this information is not intended as tax advice. Refer your clients to an independent tax professional in any situation where a client requires tax advice.

 

2. Are my child support payments tax deductible?

No, child support payments are not tax deductible. In addition, an often neglected issue pertains to the short-fall of child support obligations. When an individual is obligated to pay (both) spousal maintenance and child support, payments are first applied to satisfy child support obligations and then to spousal maintenance. In other words, child support obligations must be fully satisfied before any amount of spousal maintenance is considered deductible. See IRS Publication 504 for more information, and please note that the IRS refers to spousal maintenance as ?alimony?.

I am not a tax professional and this information is not intended as tax advice. Refer your clients to an independent tax professional in any situation where a client requires tax advice.

3. Are my legal fees from my divorce tax deductible?

Legal and other professional fees related to getting a divorce are generally not tax deductible. These non-deductible costs include expenses related in arriving at financial settlements and retaining income-producing property. However, some legal and accounting expenses can be deducted as a miscellaneous itemized deductions on form 1040 or 1040NR, subject to the 2% limitation (and also as a preference for alternative minimum tax purposes).? Here is a short list of some of these exceptions:

  • Fees related to tax advice related to a divorce,
  • Fees to determine or collect spousal maintenance,
  • Fees to determine estate tax consequences of property settlements, and
  • Appraisal and actuary fees to determine tax liabilities or to assist in obtaining spousal maintenance

See IRS Publication 529 for more information on miscellaneous itemized deductions.

I am not a tax professional and this information is not intended as tax advice. Refer your clients to an independent tax professional in any situation where a client requires tax advice.

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