Q: Tax Playa, my husband is a jerk and I want out. What are some tax consequences of divorce?
Katie, Germantown MD
A: There are lots of ins and outs to this, so we'll tackle them one at a time. This post will deal with divorce, separation, alimony, property settlements, and injured/innocent spouse rules...
For more information on these topics, please refer to IRS Publication 504, Divorced or Separated Individuals.
1. A divorce or legal separation that happens on or before the last day of the year is considered final for the whole tax year. Therefore, your marital status on the last day of the year is determinative of your filing status and personal exemptions. Click on the "filing status" link to the right for more on which is the proper filing status for you to choose.
Certain fees related to divorce are deductible as a miscellaneous itemized deduction subject to the 2% of AGI threshold rules. These include tax advice on your divorce, as well as fees to financial professionals in obtaining an alimony settlement or a property transfer.
2. Alimony is a payment by one former spouse to another under a divorce or separation agreement. Alimony is deductible to the payer as an adjustment to income (meaning they don't need to itemize their deductions). Alimony is taxable to the recipient.
Child support, property settlements, and voluntary payments are not alimony. On a marital home on which the alimony payer is making mortgage payments, he can deduct half the mortgage interest and property taxes as alimony and half as an itemized deduction (assuming the home is still jointly-owned).
Alimony must be in cash, must not be considered child support or not alimony, the parties can't live in the same household, and the payments must end on death of the recipient spouse.
3. Property settlements. There are two factors to consider here. The first is a "qualified domestic relations order." This deals with payments from qualified retirement plans and child support. Generally, benefits paid to a former spouse or child is taxable to the recipient spouse, whereas IRA transfers are tax-free.
There is no recognized gain or loss on property transfers between spouses. The basis of the property is the adjusted basis of the transferring spouse (if this transfer happened before July 19, 1984 the basis is the fair market value at the time of transfer). There is normally no gift tax implications to transferring property except in the oddest of circumstances.
4. Injured and Innocent Spouse Rules. An injured spouse is a spouse who's partner's tax refund was garnished by the IRS to pay for back taxes, child support, and debt like student loans. The non-liable spouse (injured spouse) can file to get her share of her refund from the IRS.
An innocent spouse is someone who believes a joint federal tax liability should be paid solely by her spouse. This can be true if your spouse knowingly withheld income/overstated expenses, you are divorced, or it would be unreasonable to expect you to pay.
In my experience, there are a lot of jerk husbands out there who hang their wives/ex-wives out to dry on these matters. Don't be afraid to stand up for yourselves.
how can unpaid support/alimony monies be used as a deduction for the person who is due these documented monies??
Posted by: james chapman m.d. | 2007.02.09 at 08:41 PM
Unpaid support monies are not deductible under ordinary circumstances. The only case I can think of is a bad debt, but that normally only applies to business activities.
Posted by: Ryan Ellis | 2007.02.12 at 02:20 PM
how can alimony be retaxed??? I am on disability, my ex is also, alimony is coming from his soc sec DISABILITY check, and SSDI is income insurance that was already taxed income? I am not certain it is totally legal, although it is the federal government we are talking about (smile). Technically it is double taxed. This is really unfortunate as i would have negotiated a higher alimony payment had I known. Is there a responsible party who has to let divorced spouses know of their tax liability as it pertains to their alimony judgement? Do I have a constitutional right to know ahead of time before negotiations?
If so who is responsible? Fact is I am currently disabled because of my ex spouse abuse (long term with a paper trail of proof such as restraining orders, i now have a permanent one,assault and battery first degree, ments viocence programs etc. been in contempt many times and incarcerated for non payment of alimony twice. He is hiding assets (deceased mothers home sale) by putting it in an adopted nephews name. He is now a drug addict and I believe is spending the money on drugs. Do I have nay rights to my ex,s bank statements or is there any other way to find out where this money is going?
Sorry for the very very long comment/questions. But wanted you to know all the facts. ANY way you can help would be much much appreciated. Thank you in advance. (good website) wish i had found it sooner.
Posted by: Donna | 2007.05.26 at 05:58 PM
Is alimony taxable if it is the result of a foreign separation agreement, paid in foreign currency, and the recipient lives abroad?
My husband(ex) and I are both US citizens and have lived outside of the country since 1995. We married in Australia and separated in April 2007 under a formal separation agreement that was arranged in Sydney in July 2007. It stipulates monthly maintenance payments made to me for the next 5 years. I reside in Australia, he now resides in the UK. The payments are made in Australian dollars. Do these payments have to be reported as alimony? If so, are these payments treated as "normal" US-type alimony payments and thus taxed accordingly or can some or all of it be excluded, similar to foreign income?
Posted by: Erin | 2008.02.02 at 06:50 PM