Once your divorce is final, among the various other adjustments you will need to make as you adjust to your new life, you will need to submit your federal tax returns as a single filer. There are some unique considerations to keep in mind the first time you file your taxes after your divorce (and potentially in subsequent years as well), and certain decisions that you make during the divorce process could impact your filing obligations and income tax liability.
As you prepare for your divorce, here are some of the tax-related considerations to keep in mind, whether you’re in Carmel or elsewhere in Indiana:
1. When You Are Considered Divorced for Federal Tax Purposes
For tax purposes, you are considered unmarried for the entire year in which you get divorced. IRS Publication 504 states, “You are unmarried for the whole year if . . . [y]ou have obtained a final decree of divorce or separate maintenance by the last day of your tax year. You must follow your state law to determine if you are divorced or legally separated.” On the other hand, you must still file as a married couple if, at the end of the year:
- You and your spouse are living apart but not legally divorced; and/or
- You are legally separated (pursuant to a court order), but the court has not yet issued a final order dissolving your marriage.
There is only one exception to this rule, and it only applies in circumstances where spouses divorce, “for the sole purpose of filing tax returns as unmarried individuals,” and with the intent to remarry in the following year.
2. Deducting Divorce-Related Expenses on Your Federal Returns
Some (but not all) of the expenses you incur during your divorce will be deductible on your first post-divorce return. As with all tax-related matters, you should consult with your accountant before making any decisions about what to exclude on your federal return. Divorce-related expenses that newly-single filers may deduct include:
- Legal fees for tax advice
- Legal fees to obtain alimony (technically called “spousal maintenance” in Indiana)
- Fees paid to appraisers, accountants and other financial professionals who provide tax advice
Legal fees for other aspects of your divorce cannot be deducted. Court costs are another non-deductible expense. In order to deduct eligible divorce-related expenses, you must itemize your deductions using Schedule A and the standard Form 1040 (not Form 1040A or Form 1040EZ).
3. Other Federal Income Tax Considerations Related to Spousal Maintenance
As a general rule, alimony payments are deductible by the payor and reportable income for the recipient. However, for tax planning purposes, divorcing spouses have the option to designate certain payments as “not alimony,” and other voluntary payments not qualifying as alimony may receive different tax treatment. For the payor, itemization is not necessary in order to claim alimony deductions (unlike deducting the divorce-related expenses discussed above); however, use of the standard Form 1040 is still required.
4. Tax Treatment of Child Support
If you have children from your marriage, you can generally expect that either you or your spouse will have an obligation to pay child support. The federal income tax rules for child support differ substantially from those for alimony. As stated by the IRS:
“Child support is never deductible and isn't considered income. Additionally, if a divorce or separation instrument provides for alimony and child support, and the payer spouse pays less than the total required, the payments apply to child support first.”
Importantly, for tax purposes, a payment from one former spouse to another can be considered child support for tax purposes even if it is not specifically designated as child support and is paid in addition to the support required under the parties’ divorce decree. The IRS’s income tax rules also state that if a former spouse underpays the total amount owed for alimony and child support under a final divorce decree, for tax purposes, any payments that have been made must be, “appl[ied] first to child support and then to alimony.”
5. Outstanding Tax Liability from the Marriage
If you filed joint tax returns during your marriage, you are “jointly and severally” liable for any underreported tax obligations, even if your spouse was the one who did the underreporting. However, if you are facing liability for back taxes incurred during your marriage and you were unaware that your spouse was underreporting, you may be eligible for Innocent Spouse Relief. There are three types of Innocent Spouse Relief, each of which is available under different circumstances:
- Innocent Spouse Relief – If your former spouse failed to report his or her income to the IRS on a joint return, this type of relief may be available. In order to establish eligibility, you must be able to establish that: (i) you did not know (and had no reason to know) that your then-spouse was underreporting, and (ii) it would be “unfair” to hold you liable for your former spouse’s error.
- Separation of Liability Relief – If the IRS determines that you and your former spouse are jointly liable for additional tax as a result of an unintentional error, you can seek to allocate the additional tax liability between you and your former spouse based upon you and your former spouses’ respective taxable incomes for the relevant return(s).
- Equitable Relief – If you and your spouse both properly reported your income but failed to pay the tax due, you may be eligible for equitable relief. In order to establish eligibility, you “must establish that under all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax.”
Are You Preparing for a Divorce in Carmel, IN?
If you live in the Carmel area and are considering a divorce, we encourage you to contact us for a complimentary initial consultation. Divorce lawyer Joshua R. Hains has over a decade of experience representing spouses in high-net-worth divorces and other complex family law matters. To speak with Mr. Hains in confidence, please call (317) 588-2883 or request an appointment online today.