Disclaimer. The following information is intended for general informational purposes only and does not represent tax advice to any individual or entity, either expressly or implied. Laws and regulations vary by jurisdiction and may change frequently. Compliance with such standards depends on one’s particular circumstances. Any reliance on this information is solely at the user’s own risk. Before making individual or business tax decisions, you are encouraged to seek professional tax advice.
TAX TIPS FOR ATTORNEYS
IN FAMILY LAW
©2013 Kent Rackett
KENT RACKETT, Esq.
Tax & Business Lawyer
1718 M Street Suite 1250
Dupont Circle, Washington, DC 20036
I. Tax Considerations in Divorce & Separation
Divorce proceedings have numerous tax repercussions that pose challenging planning considerations for separated and divorced taxpayers, including the change in tax filing status, and the treatment of certain income and deductions related to children, alimony, property transfers, and the marital home. Thorough review of the tax effect is essential for negotiating equitable divorce settlements.
A. Filing Status.
Only individuals who are married at the close of the tax year may file a joint tax return. Normally, filing a joint return produces a lower tax on the combined incomes of a husband and wife than would result by filing separately.
Spouses who are legally separated under a decree of divorce or separate maintenance are not considered married for tax purposes. Unmarried taxpayers must file as single unless they meet the requirements for filing as head of household, which has lower marginal rates.
For Federal tax purposes, a marriage is defined as a legal union between a man and a woman only, in contrast to D.C., where same-sex couples may file jointly.
B. Tax Benefits of Children.
Generally, the child of a divorced or separated parent qualifies for the dependency exemption of the parent that he or she resided with for the longer period of time during the tax year (known as the custodial parent).
Parents may not split the tax benefits arising from the dependency exemption, (such as the child tax credit and dependent care credit), although, in the case of multiple children in a family, each parent may claim a different child. In contrast, where a student is a claimed a dependent, qualified tuition and related expenses paid by the student are treated as paid by the taxpayer, even if paid by a third party.
C. Alimony & Child Support.
Alimony is a form of support that is taxable to the payee spouse and equally deductible to the paying spouse, making it a useful tool in shifting income to the spouse in the lower tax bracket. Additionally, alimony payments can be made to third parties for the benefit of the payee spouse, enabling support agreements to be fully deductible, where they may otherwise be limited.
In contrast to alimony, payments representing child support are neither includible in the income of the payee nor deductible by the payer spouse.
D. Property & Stock Transfers.
Generally, no gain or loss is recognized on a transfer of property from an individual to or in trust for a spouse or former spouse if the transfer is incident to a divorce. Nonrecognition applies, even where the parties are acting at arms length, and the transferee spouse pays full consideration for the property.
E. Retirement Accounts.
A spouse or former spouse of an employee may receive a tax-free rollover distribution from that employers qualified retirement plan as part of a court-approved property settlement.
F. The Marital Home.
The nonrecognition rule applies to a spouses transfer of the martial home incident to divorce. If the home is later sold to a third party, gain up to $250,000 can be excluded from gross income, provided the spouse has owned and used the home as his or her principal residence for periods aggregating two of the five years immediately prior to the sale.
II. Innocent Spouse Relief
Joint filers are jointly and severally liable for all income tax, related penalties, and interest, including later determined deficiencies, subject to innocent spouse relief. Spouses are relieved from liability if they establish that: 1) they did not know (and had no reason to know) of the tax deficiency; and 2) taking all facts and circumstances into account, it is inequitable to hold the unknowing spouse liable for the deficiency. In furtherance of equity, the IRS will now consider requests that had previously been time barred where the requesting spouse had failed to make the election for relief within two years after the IRS begins collection activities against them.
III. The Adoption Credit
Taxpayers who adopted (or attempted to adopt) a child and have paid qualified expenses relating to the adoption may claim a tax credit for as much as $13,170. Qualified expenses include adoption fees, court costs, attorney fees, and travel expenses. Expenses associated with a foreign adoption, in which the child was not a U.S. citizen or resident at the time the adoption process began, qualify only if the adoption is finalized.
Taxpayers whose employer has paid for adoption expenses under a qualified adoption assistance program may exclude from income $13,170 that would ordinarily be taxable as a fringe benefit on their W-2. One cannot claim a credit for the same adoption expenses used to claim the income exclusion.
In past years, the adoption credit was nonrefundable (meaning tax liability was reduced to zero, but not below), but one could carry any unused credit forward. Under the 2011 Affordable Care Act, the credit is now refundable, reducing tax liability to zero, with the IRS refunding any remaining credit in the current tax year.
About the Author: KENT RACKETT is an attorney admitted to practice in the District of Columbia and New York. Having successfully passed the CPA exam after college, he pursued his interest in tax by working for accounting firms before attending New York Law School. He focuses on helping individuals and small businesses save money, while protecting and enforcing their rights in the areas of tax counseling, business law, estate administration, elder law, and government benefits. As a niche, he serves as an accountant and consultant to attorneys, assisting them in setting up their practices, accounting and preparing tax returns, and consulting on aspects of tax law that arise in connection with their clients legal matters.
IRS Circular 230 Disclaimer: Any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed herein.