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The Tax Consequences of a Divorce
The Tax Consequences of a Divorce
Timothy J. Evans Timothy J. Evans The Law Office of Timothy J. Evans, The Law Office of Timothy J.PLLC Evans, PLLC 606 Adeline Street, Suite 1A 606 Adeline Street, Suite 1A Hattiesburg, MS 39401 Hattiesburg, MS 39401 (601) 255-5085 (601) 255-5085
[email protected] [email protected] www.timothyjevanslaw.com www.timothyjevanslaw.com www.hattiesburgdivorcelawyer.com www.hattiesburgdivorcelawyer.com
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It’s there areare only twotwo things that are and taxes. It’s said saidthat that there only things thatcertain—death are certain—death and taxes. When divorce, thethe taxes partpart of that is definitely true. true. When ititcomes comestotoa a divorce, taxes of saying that saying is definitely Almost ofof a divorce—the property settlement, child support, and Almostall allaspects aspects a divorce—the property settlement, child support, and 1 Thisis spousal have implications for you April 15.1 a spousalsupport—can support—can have implications forcome you come AprilThis 15.article article is a
very how thethe outcomes of aof divorce can affect tax liability. For very general generalsurvey surveyofof how outcomes a divorce can affect tax liability. For a more one should consult with with a family lawyer,lawyer, a tax lawyer, moredetailed detailedview, view, one should consult a family a tax lawyer, and/or public accountant. and/ora acertified certified public accountant. Alimony Alimony The Internal Code (IRC) defines alimony as aas cash payment InternalRevenue Revenue Code (IRC) defines alimony a cash payment received of of a spouse under a divorce or separation agreement received by byor oron onbehalf behalf a spouse under a divorce or separation agreement which as as non-alimony and is notischild paid when whichisisnot notdesignated designated non-alimony and notsupport, child support, paid when the members of the same household, and for which the the parties partiesare arenot not members of the same household, and for which the obligation does notnot survive the the payor’s death. Whew! So, from obligationtotopay pay does survive payor’s death. Whew! So,that from that mouthful, have wewe learned? mouthful,what what have learned? •• Paid byby cash or check. Transferring property will notwill count alimony. Paid cash or check. Transferring property notascount as alimony. •• Received byby or or on on behalf of aof spouse. Required payments to a third Received behalf a spouse. Required payments to aparty, third party, such or or mortgage payments maymay qualify as alimony. suchas asmedical medicalexpenses expenses mortgage payments qualify as alimony. •• Pursuant to atodivorce or separation agreement. Any “extra” payments Pursuant a divorce or separation agreement. Any “extra” payments above the required by by the the divorce decree will not as alimony. theamount amount required divorce decree willcount not count as alimony. •• Not designated as non-alimony. The IRC what would be Not designated as non-alimony. The allows IRC allows what otherwise would otherwise be considered to to bebe treated as non-alimony by including a provision to consideredalimony alimony treated as non-alimony by including a provision to
1 1 While While II am to practice practice law law in in Mississippi, Mississippi, this primarily with am only only licensed licensed to this article article is is concerned concerned primarily withthe theeffects effects of of aa divorce on federal income taxes. For more information than this article contains, see IRS Pub 504. divorce on federal income taxes. For more information than this article contains, see IRS Pub 504.
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that divorce decree or settlement agreement. (Incidentally, you thateffect effectinina a divorce decree or settlement agreement. (Incidentally, you cannot non-alimony into into alimony by agreement). cannottransform transform non-alimony alimony by agreement). •• Not forfor thethe support of aofchild. If payments are modified or terminated Not support a child. If payments are modified or terminated upon events, such as the of a certain age, than thethan the uponchild-related child-related events, such as attainment the attainment of a certain age, payment considered child support and not paymentwill willbebe considered child support andalimony. not alimony. •• Not survive thethe payor’s death. Any payment that would deaththe death Not survive payor’s death. Any payment that survive would the survive of the would notnot be alimony. So, any benefitsbenefits that thepaying payingspouse spouse would be alimony. So, life anyinsurance life insurance that may the death of aofdying spouse would not count as may be be received receivedupon upon the death a dying spouse would not count as alimony.2 alimony, under Mississippi law aslaw described below, below, alimony. 2(Some (Someforms formsofof alimony, under Mississippi as described do not criteria.) notmeet meetthis this criteria.) Traditional thatthat which is paid month,month, fits the fits IRC’s definition Traditionalalimony, alimony, which is every paid every the IRC’s definition of alimony. other hand, lumplump sum sum alimony does not, mainly alimony.On Onthe the other hand, alimony does not, because mainly because the pay lump sumsum alimony can survive the death the paying the obligation obligationtoto pay lump alimony can survive the of death of the paying spouse. spouse. Generally, is is considered income to the spouse. This This Generally,alimony alimony considered income toreceiving the receiving spouse. means can deduct the the alimony payments on his on or her means the thepaying payingspouse spouse can deduct alimony payments his or her taxes. taxes. Child & Child-Related Payments ChildSupport Support & Child-Related Payments Overall, regarding child support are much more simple Overall,the thecode codesections sections regarding child support are much more simple than alimony. LikeLike alimony, child support can come many in many thanthose thoseregarding regarding alimony. alimony, child support canincome forms. be be money thatthat is paid to a custodial parent,parent, it can beit can be forms.ItItcan cansimply simply money is paid to a custodial
2 Generally, Generally,life life insurance insurance benefits benefits are are not not considered considered taxable taxable income income under under the the IRC. IRC. AA full full discussion of the taxability of life life insurance insurance benefits benefits is outside outside the scope scope of taxability of of this this article. 2
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insurance college expenses, or any otherother number of payments on insurancepayments, payments, college expenses, or any number of payments on behalf a child. behalfor orbenefitting benefitting a child. Unlike however, child support is notisconsidered incomeincome by the by the Unlikealimony, alimony, however, child support not considered Internal (IRC),and it isitnot deductible by theby payor. Some types InternalRevenue RevenueCode Code (IRC),and is not deductible the payor. Some types of child payments, such as medical expenses, may be deductible under under childsupport support payments, such as medical expenses, may be deductible other of of thethe IRC. otherprovisions provisions IRC. As you there areare a number of child-related deductions available you may mayknow, know, there a number of child-related deductions available to income taxes. These include the child credit, to those thosefiling filingfederal federal income taxes. These include the tax child tax credit, dependency and educational credits. These deductions and credits dependencyexemptions, exemptions, and educational credits. These deductions and credits belong parent, but but a method does does exist for transferring these to these to belong to tothe thecustodial custodial parent, a method exist for transferring the parent through the use IRSofForm 8332. Medical expenseexpense the non-custodial non-custodial parent through theofuse IRS Form 8332. Medical deductions claimed by by either parent. deductionscan canbebe claimed either parent. Property PropertyTransfers Transfers A divorce involves some transfer of property, whether it be anit be an divorceusually usually involves some transfer of property, whether interest or or other realreal property, a business interest, or evenor aneven an interestinina ahouse house other property, a business interest, investment. to the stereotype of the of these do investment.Contrary Contrary to the stereotype ofIRS, the most IRS, most of transfers these transfers do not taxtax liability. not incur incurany any liability. As long transfer is “incident to divorce,” there isthere no gain or gain or long as asthe theproperty property transfer is “incident to divorce,” is no loss thethe transfer. A transfer is “incident to divorce” if it occurs loss associated associatedwith with transfer. A transfer is “incident to divorce” if it occurs within ofof thethe date of the divorce or is or “related to the to cessation of the of the withinone oneyear year date of the divorce is “related the cessation marriage.” transfer occurs within six years of the of date divorce and is and is marriage.”IfIfthe the transfer occurs within six years theofdate of divorce made to to a divorce decree or separation agreement, then the IRSthe IRS made pursuant pursuant a divorce decree or separation agreement, then considers to be related to the of theof marriage. considersthe thetransfer transfer to be related to cessation the cessation the marriage.
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When between spouses, attorneys and courts should should When dividing dividingproperty property between spouses, attorneys and courts 3 Property consider ofof thethe property.3 Property transfers incident to divorce have have considerthe thebasis basis property. transfers incident to divorce
a carryover is, is, thethe basis is carried over from original purchaser carryoverbasis. basis.That That basis is carried over the from the original purchaser to receives thethe property in the to the theperson personwho who receives property intransfer. the transfer. There gains, which maymay be taxed, uponupon the later of sale the of the There may maybe becapital capital gains, which be taxed, thesale later property. thethe basis, thethe more capital gainsgains may have property.The Thelower lower basis, more capital maybeen haveearned, been earned, and that may be due uponupon the sale theof property. and the themore moretax tax that may be due the of sale the property. For possible for for both a husband and wife receive property For example, example,ititisis possible both a husband andtowife to receive property worth in in thethe divorce, but because of theofbasis, one spouse’s worth$100,000 $100,000 divorce, but because the basis, one spouse’s distribution is is worth more thanthan the other. If the wife’s has a basis distribution worth more the other. If the property wife’s property hasofa basis of $70,000 husband’s hashas a basis of $10,000, then itthen can be seenbe that $70,000and andthe the husband’s a basis of $10,000, it can seen that the may bebe considered more valuable even even though both pieces the wife’s wife’sproperty property may considered more valuable though both pieces of property equal fairfair market value. The husband has $90,000 of propertyhave haveanan equal market value. The husband has $90,000 of capital may have to pay tax tax on those gainsgains should he sellhe thesell the capitalgains gains(and (and may have to pay on those should property), the wife hashas onlyonly $30,000 of gains. From From a tax perspective, the property),but but the wife $30,000 of gains. a tax perspective, the wife bargain. wife has hasreceived receivedthe thebetter better bargain. Other Considerations Other Considerations Attorney decree may callcall for for oneone spouse to pay AttorneyFees. Fees.AAdivorce divorce decree may spouse to the pay the attorney other. Unfortunately, the Internal Revenue Code considers attorneyfees feesofofthe the other. Unfortunately, the Internal Revenue Code considers such notnot be be deductible. There are two though.though. (You (You suchpayments paymentstoto deductible. There areexceptions, two exceptions, really thethe taxtax code to be simple, did you?) reallydidn’t didn’texpect expect code tothat be that simple, did you?)
3“Basis,” “Basis,”in in aa nutshell, nutshell, is what the property originally cost. 3
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First, fees areare paidpaid by an recipient and were First,ififthe theattorney attorney fees byalimony an alimony recipient and were incurred alimony, some or allorofall theoffee deductible. Second,Second, to incurredtotosecure secure alimony, some themay fee be may be deductible. to the anan attorney fee fee waswas paidpaid for advice or assistance in determining the extent extentthat that attorney for advice or assistance in determining the of of child support, alimony, or property division,division, the the taxable taxableconsequences consequences child support, alimony, or property the fee may may be bedeductible. deductible. Status AsAs with all factors affecting tax status, it is theit is the Statusas asofofDecember December31. 31. with all factors affecting tax status, status asas of of December 31 that is determinative of howof they may statusofofthe thespouses spouses December 31 that is determinative how they may file. is is notnot final by December 31, then couple must file as file as file. IfIfthe thedivorce divorce final by December 31, the then the couple must married. is is final, theythey mustmust file as single or head household. Normally, married.IfIfit it final, file as single orof head of household. Normally, only may filefile as head of household. only one oneofofthe thespouses spouses may as head of household. Refunds. may decide who will will receive a taxarefund if the if the Refunds.The Theparties parties may decide who receive tax refund divorce atat that time. If theIf refund is not is addressed by agreement, divorceisispending pending that time. the refund not addressed by agreement, the to to thethe spouse whose tax payment created the refund. The the refund refundbelongs belongs spouse whose tax payment created the refund. The IRS provides to to make thisthis determination. providesaaformula formula make determination.
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About Timothy J. Evans About Timothy J. Evans
Tim University of Mississippi on a Naval ROTCROTC scholarship. Tim attended attendedthe the University of Mississippi on a Naval scholarship. After and receiving his his commission, Tim served three years the in the After graduating graduating and receiving commission, Tim served threeinyears U.S. as as a high school teacher, Tim decided to attend law U.S. Navy. Navy.While Whileworking working a high school teacher, Tim decided to attend law school, to Mississippi College School of Law Jackson, school,and andwas wasadmitted admitted to Mississippi College School ofinLaw in Jackson, Mississippi. Mississippi. Tim’s experience ranges from serving as a as judicial law clerk Tim’sprofessional professional experience ranges from serving a judicial law clerk to Mississippi Court of Appeals, to representing persons injured injured to aa judge judgeon onthe the Mississippi Court of Appeals, to representing persons by at at oneone of the largest firmsfirms in Hattiesburg, Mississippi, by asbestos, asbestos,totoworking working of the largest in Hattiesburg, Mississippi, to own firm. Tim Tim prides himself on his on ability explain to opening openinghishis own firm. prides himself histo ability to explain complicated in everyday language and and keeping his clients well- wellcomplicatedlegal legalconcepts concepts in everyday language keeping his clients informed. informed. Tim to to thethe former Laura Day Day of Hattiesburg. We have Tim isismarried married former Laura of Hattiesburg. Wetwo have two children, Sara, and we we areare members of Crosspoint Community children,Wesley Wesleyand and Sara, and members of Crosspoint Community Church ChurchofofHattiesburg. Hattiesburg.
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