Tax Issues to Consider in a Texas Divorce
Divorce often presents tax issues and challenges, including those relating to property and debt division, alimony, child support, and sometimes previously-filed (or yet to be filed) tax returns.
Because of the complexity and high stakes associated with divorce and taxes, this area is one in which you should try to keep the communication open and the emotions out. Remember to approach your divorce like a business. It will only benefit Uncle Sam if you file separate tax returns out of spite when filing jointly is beneficial. Do not assume that you will be able to claim all deductions and exemptions. That will only lead to fines, penalties, and audits if you are wrong. Make sure that all tax-related issues are settled and clearly stated in your Separation Agreement.
- Filing Status: How are you going to file your taxes? Determine the most financially feasible way. Typically, filing a joint return will result in the lowest taxes. Hint: Do not look at a joint return as any kind of attachment to your spouse; this decision is strictly financial.
- If you do sign a joint return, the law holds both you and your spouse responsible for the entire tax liability. This is called joint and several liability. “Joint and several liability” applies not only to the tax liability you show on the return but also to any additional tax liability the IRS determines to be due, even if the additional tax is due to income, deductions, or credits of your spouse or former spouse. You remain jointly and severally liable for the taxes, and the IRS can still collect from you, even if you later divorce and the divorce decree states that your former spouse will be solely responsible for the tax obligation.
- If you have wrongfully been held responsible for your spouse’s obligation, you can claim that you are an innocent spouse and file the appropriate forms with the IRS. Here, you argue that you did not know, and had no reason to know about any under-reporting of income or other wrongdoing associated with the filing of the return. Your argument is that you should not be held responsible for paying any additional taxes, penalties or interest due.
- Exemptions: You may claim a child that does not live with you only if it is stated in your Separation Agreement or if mutually agreed upon. Allocation of the tax dependency exemption may be modified by the court upon the filing of a motion by either party. If it can be shown that it would be in the best interest of the child for the non-residential parent to claim the child as a tax dependency exemption, the court can award the exemption to the non-residential parent.
- Liabilities and Refunds: Tax refunds are usually treated as joint property and are typically shared equally among the parties. In the heat of the moment, some spouses will intercept a tax refund and cash it without the other’s knowledge. All funds must be accounted for and it is likely that if a spouse engages in this behavior their share of the final property settlement may be reduced.
Tax implications of Texas child support and alimony
If you pay or receive alimony, there are tax ramifications. Alimony is taxable to the recipient and deductible by the payer. On the other hand, child support is neither taxable nor deductible.
Beware of classifying child support as alimony
Because child support, alimony, and property division are often considered together in negotiating a divorce settlement, it can be tempting to manipulate the characterization of support or a given property transfer as alimony to a lower-income spouse in order to reduce tax liabilities for both spouses. The IRS will often review the records and recapture these funds.
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