Tax Planning in a Massachusetts Divorce

The beginning of the year is when many think about taxes, but failing to consider tax consequences while negotiating a divorce settlement can be costly. What is involved in Tax Planning in a Massachusetts Divorce?

Alimony and Child Support

Alimony is deductible to the spouse who pays it, however, the IRS considers it income for the receiving spouse. For 2014, a top tax bracket of 39.6% applies for single filers who have adjusted gross income over $406,751. An alimony award that provides a nice tax deduction may saddle the other former spouse with a lot more taxable income. Child support is tax neutral and does not qualify for a deduction or as income. Characterization of child support or alimony can thus affect the tax burden of each party.

Deducting Attorney’s Fees

General legal fees associated with a divorce are not tax deductible.  However, attorney's fees and other litigation costs are deductible to the extent they are incurred to produce income that is includable in the recipient's gross income. Because spousal support is includable in gross income, the fees incurred in obtaining the spousal support or in collecting delinquent spousal support are deductible.  The expense would be reported on Schedule A to form 1040 as a miscellaneous itemized Deduction subject to the 2% AGI threshold.  For further information, please consult a tax preparation specialist.

Filing status dependent on December 31

When a divorce is not final before December 31, it may make sense to file jointly one last year to minimize the tax impacts. If on the other hand, the judge signed a final decree prior to December 31, the filing status is limited to single or head of household. The amount of custodial time affects which parent can claim the child dependency exemption. Often parties will rotate the dependency between even and odd years, or specify that each spouse may claim a specific child each year in the case of multiple children.  If the parent with more than 50 percent of the custodial time agrees to give the exemption to the other parent, this must be in writing through an executed IRS form 8332. An experienced family law attorney will be able to provide more guidance on any tax concerns during the divorce process. Forgetting to consider how taxes will cut into a property settlement or alimony award can be costly.

Head of Household Filing Status

If you are unable to file jointly, you may qualify to file as head of household.  The standard deduction for head of household is higher than for single, but has dependency and housing requirements.  To qualify as head of household, you must be unmarried or “considered unmarried” for IRS purposes, meaning you file a separate tax return, your spouse did not live in your home for the past 6 months, among other things. You must also have paid more than one-half of the total cost of upkeep for your home including payment of property taxes, mortgage interest expenses, utility charges and food consumed on the premises and/or other household expenses. Finally, a qualifying person must have lived with you in the home for more than one-half of the year.  A child, grandchild or certain other dependent relatives may be a qualifying person for IRS purposes.  Divorced parents should note that you do not have to claim the child as a dependent in order to qualify for head of household filing status; a custodial parent may be able to claim head of household filing status even if he or she released a claim to exemption for the child through IRS form 8332.  An experienced family law attorney or tax professional can provide additional information about head of household filing status.

-Elisabeth R. Feeney, Esq.

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