By Ron J. Anfuso, CPA, ABV, CDFA, DABFA
The statistics are startling. According to the National Center for Health Statistics, more than half of the people who have been divorced remarry, although recent surveys have found that nearly 60% of these marriages break up as well.
Without a doubt, these events can make tax paying ever more complex. This article briefly explains the tax implications of divorce and remarriage.
Marital status is an important factor in determining income and estate tax liabilities. Marital status is determined on the last day of the tax year. So if a marriage is dissolved before the last day of the year, the parties may file for that year as either Single or Head of Household (if they qualify), which allows for lower tax rates than the alternative married-filing-separately status.
A taxpayer qualifies for Head of Household with the following:
- The taxpayer is not married at the end of the year
- The taxpayer pays more than one-half of the costs to maintain the household
- A child who qualifies as a dependent lives with the taxpayer more than one-half of the year.
Spousal support is deductible by the spouse paying it and taxable income to the spouse receiving it. In fact, the written instrument or divorce decree cannot include any type of verbiage excluding the payments from the income of the receiving spouse or rendering them non-deductible by the paying spouse.
Both spouses’ tax liabilities should be considered when determining what amounts are to be paid as support.
Only cash payments, including checks and money orders, qualify as spousal support. According to the IRS, the following cannot be used:
- Transfers of services or property (including a debt instrument of a third party or an annuity contract
- Execution of a debt instrument by the payor
- The use of property
Occasionally, property settlements are used as a substitute for spousal support in an attempt to reduce payments. However, the IRS has written recapture rules to prevent such non-deductible property settlement payments from being deducted as spousal support. The rules come into effect to the extent that support payments decrease annually in excess of $15,000 during the first three calendar years after the judgment.
Any fees paid for obtaining spousal support advice and for tax advice in connection with the divorce are deductible as miscellaneous itemized deductions, but fees paid for the divorce itself generally are not deductible.
Spousal support liability stops upon the death of either spouse or upon the remarriage of the receiving spouse.
Child support payments are not deductible by the payor spouse, nor are they income to the payee spouse. Payments must be designated as child support; if they are not, then the payments that are to be reduced when the child reaches majority, graduates from high school, leaves home, etc. will be re-characterized as child support.
The parent who has custody of a child for the greater portion of the year (the custodial parent) is entitled to the dependency exemption and related child tax credits for the child unless that parent waives that right in writing. The specific IRS requirements provide that the child:
- Must receive over half of his or her support during the calendar year from his or her parents
- The parents must be divorced or legally separated under a decree of divorce or separate maintenance must be separated under a written separation agreement or must live apart at all times during the last six months of the calendar year
- The child must be in custody of one or both parents for more than one-half of the calendar year.
For the non-custodial parent to take the dependency exemption, he or she must have a signed IRS Form 8332 from the custodial parent granting the exemption. Even if the custodial parent waives the exemption, that parent may still qualify for the earned income credit, child care credits, and head-of-household rate. To do so, the parent must maintain the home for the dependent child more than half of the year.
In the settlement and negotiation process, consider giving the dependency exemption to the spouse whom will benefit most. Exemptions are phased out for higher-income taxpayers.
Regardless of which parent gets the dependency exemption, however, the parent who pays the child’s medical expenses may claim the related deductions along with his or her own tax return.
Child Care Credit
There is a child care credit available for the custodial parent who pays child or dependent care expenses so that the person can be gainfully employed. In order to claim this credit, the taxpayer must maintain a household that is the home of at least one qualifying child. The child care credit is not available to the non-custodial parent even if he or she is entitled to claim the exemption for the child.
To be sure, divorce and remarriage cause taxation issues that need to be carefully planned for. Those finding themselves in such situations should consult a professional tax planner to insure all aspects are being considered.
Bio for Ron J. Anfuso, CPA, ABV, CDFA, DABFA
Ron J. Anfuso, CPA, ABV, CDFA, DABFA is a Rancho Palos Verdes-based Forensic Accountant whose services include analysis of financial, accounting and tax aspects of marital dissolution matters, including business valuations, Pereira apportionment of business interests, Van Camp analyses, determination of gross cash flow available for support, marital standard of living analyses, and tracing engagements for the purposes of determining post-separation reimbursements, family code §2640 reimbursements and characterization of property as community or separate. Additionally, he has performed services regarding various other family law issues including allocation of interest in pension plans and apportionment of interests in real property (Moore/Marsden calculations) and other special projects.
Mr. Anfuso has testified as an expert witness in family law and civil/commercial litigation matters in Los Angeles, Orange and Santa Clara Superior Courts. Although traditional litigation involves court appearances, Mr. Anfuso is also versed in The Collaborative Divorce process and assists many couples in a resolution of the financial matters of their divorces without the necessity of a court battle.
In addition to being a Certified Public Accountant, Mr. Anfuso has earned the designations of Accredited in Business Valuation, Certified Divorce Financial Analyst and Diplomate of American Board of Forensic Accounting.