Divorce and Taxes
A divorce is an extremely unsettling experience. Between the emotional toll it has on you and your family, the short term financial burdens on your income while you wait for the final judgment, the long term impact to your income and the impact it can have on your tax situation, it’s reasonable to assume that this will be a trying and confusing time.
Information about Divorce and Taxes
To offer you guidance, there are several IRS publications that relate specifically to situations where a divorce has occurred in the previous taxable year. The following publications issued by the IRS deal with udgments of divorce and the tax ramifications and issues that may arise. At The Kronzek Firm, our family law attorneys are NOT tax attorneys, but based on our experience, we believe that the following publications may be of some assistance to you:
This publication summarizes important tax changes that took effect in 2009. Most of these changes are discussed in more detail throughout this publication.
This publication discusses some tax rules that affect every person who may have to file a federal income tax return. It answers some basic questions, like who must file; who should file; what filing status to use; how many exemptions to claim; and the amount of the standard deduction.
This publication explains the requirements you must meet to claim the credit for child and dependent care expenses. It explains how to figure and claim the credit.
You may be able to claim the credit if you pay someone to care for your dependent who is under age 13, or for your spouse or dependent who is not able to care for himself or herself. The credit can cover up to 35% of your expenses. To qualify, you must pay these expenses so you can work or look for work.
This publication also discusses some of the employment tax rules for household employers.
This publication explains tax rules that apply if you are divorced or separated from your spouse. It covers general filing information and can help you choose your filing status. It can also help you decide which exemptions you are entitled to claim, including exemptions for dependents.
The publication also discusses payments and transfers of property that often occur as a result of divorce and how you must treat them on your tax return.
Examples include alimony, child support, other court-ordered payments, property settlements, and transfers of individual retirement accounts. In addition, this publication also explains deductions allowed for some of the costs of obtaining a divorce and how to handle tax withholding and estimated tax payments.
The last part of the publication explains special rules that may apply to persons who live in community property states.
The earned income credit (EIC) is a tax credit for certain people who work and have earned income under a certain dollar amount. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe. The EIC may also give you a refund.
Part 1 of this publication explains the filing requirements and other tax information for individuals who can be claimed as a dependent on another person’s tax return.
Part 2 explains how to report and figure the tax on investment income of certain children (whether or not they can be claimed as dependents).
This publication discusses the rules for deducting home mortgage interest. Part I contains general information on home mortgage interest, including points and mortgage insurance premiums. It also explains how to report deductible interest on your tax return.
Part II explains how your deduction for home mortgage interest may be limited. It contains Table 1, which is a worksheet you can use to figure the limit on your deduction.
EITC is for people who earn less than a certain dollar amount. If you qualify, it could be worth a great deal depending on your filing status and the number of qualifying children. You could potentially pay less federal tax, or even get a refund.
When you file a joint income tax return, the law makes 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 still can collect from you, even if you later divorce and the divorce decree states that your former spouse will be solely responsible for the tax.
In some cases, a spouse (or former spouse) will be relieved of the tax, interest, and penalties on a joint tax return. Three types of relief are available to married persons who filed joint returns:
- Innocent spouse relief
- Separation of liability relief
- Equitable relief
Married persons who did not file joint returns, but who live in community property states, may also qualify for relief. This publication explains these types of relief, who may qualify for them, and how to get them.
This publication is intended primarily for individuals sent here by the instructions to Forms 1040, 1040A, 1040NR and 8812. Even if you were not sent here by the instructions to one of the forms, you can still choose to use this publication to figure your credit. However, most individuals can use the simpler worksheet in their tax form instructions.
This publication includes a detailed example of a taxpayer who figures the child tax credit and the additional child tax credit.
It also helps you to figure out the child tax credit you claim on Form 1040, line 51; Form 1040A, line 33; or Form 1040NR, line 47; and to figure out the amount of earned income you enter on line 4a of Form 8812, Additional Child Tax Credit.
If you have recently gone through the divorce process in Michigan, you should be aware that you are entitled to various IRS tax sections that are unavailable to a large majority of yearly tax payers. It is important that you are aware of the opportunities that you may take advantage of, as well as help guide you in filing your first post-divorce tax return.
It should be noted that due to the constantly changing terrain of Tax law, you should speak with your tax preparer or accountant if you are unsure of any of the ramifications of these publications, as well as to verify that the publications are followed correctly in your tax return.
The Consequences of Divorce on your Taxes
Alimony is now called Spousal Support in Michigan. Like many other money transfers, spousal support or alimony payments will have federal income tax consequences for the spouse that pays and for the spouse receiving the payments. The Internal Revenue Code says that alimony payments are tax deductible for the payor and must be reported as taxable income by the person receiving the alimony or spousal support.
Both spouses must remember that the federal income tax code has a strict set of guidelines defining alimony. Spouses that fail to follow these very strict guidelines may well find themselves unable to categorize these payments as spousal support or alimony. Although we are not tax attorneys or accountants, our team can offer you simple guidance on these issues and we can refer you to qualified tax professionals for detailed advice when necessary.
In Michigan, we use the terms “alimony” and “spousal support” interchangeably. They mean the same thing and our judges throughout Mid-Michigan often use both phrases. In Lansing and throughout Ingham, Clinton and Eaton Counties, the term “spousal support” may be a bit more common than alimony.
In order for alimony payments to be deductible, federal tax laws and the Internal Revenue Code mandate the following:
- The payments are made in cash, check or money order (no promissory notes, transfers or use of property, transfer of services, etc.) to the spouse, or to a third party in lieu of alimony at the written request of the recipient spouse, stating the payments are intended as alimony, and the request is received before the tax return is filed
- The divorce decree, order or the written agreement of the parties does not identify the payments as something other than alimony
- The spouses do not file a joint return with one another
- The spouses are not members of the same household when the payments are made
- There is no liability to make the alimony payments after the death of the recipient spouse
- The alimony payments are not treated as child support
Division of Property
Divorces involve a division of the property owned by the couple. In Michigan, property is any asset or any debt. A division of property is not usually a taxable event. Said another way, neither spouse owes taxes or gets a deduction from income because he or she receives certain property as a result of the divorce. There are however, tax issues following divorce that affect future taxes. More specifically, selling personal and real property in the future may require spouses who received the property based on the Michigan judgment of divorce to pay taxes related to that property.
Personal and real property have a “basis” for federal tax purposes. The basis is usually the purchase price of the property. When the property is sold later, the amount by which the sale price exceeds that basis is usually called “capital gain.” Capital gain is usually taxable at special rates. Currently, capital gains taxes are lower than taxes on ordinary income.
Therefore, when property or assets distributed pursuant to a divorce judgment is later sold by the spouse that received them in the divorce, that spouse recipient may be required to pay taxes on the proceeds of the sale.
For example, in a divorce, the wife may receive the family home while the husband might receive stock or other investments equal in value to the house. If the house has a lower cost basis than the cost basis of the stock, when both are sold, the husband could end up with significantly more money, because he owes less capital gains tax. However, your tax advisor will also factor in the significant exemption that is presently given to the seller of a qualified personal residence.
The parent who is granted custody of the child or children from the marriage normally gets child support. Child support is based on a mandatory formula called the Michigan Child Support Formula. It is a complex calculation. However, child support payments are not included in the taxable income of the receiving spouse and are not tax deductible by the spouse making the payments according to present law or the IRS.
If the written agreement or judgment of divorce orders both child support and spousal support and the spouse making the payments pays less than the required total amount for both, for tax purposes the child support obligation is deemed paid in full first. Only money exceeding the amount of the child support obligation is treated as spousal support for federal income tax purposes.
This information is general in nature and you should never rely on it because Michigan law and federal tax law changes often. You should always rely on your tax advisor and your lawyer to provide you with updated, accurate information about the tax consequences associated with a divorce in Ingham County, Eaton County, Clinton County or Lansing.
Mid Michigan Divorce Attorneys
At The Kronzek Firm, our family law attorneys have been representing clients for decades in divorce proceedings, ensuring that their rights are protected and their best interests are fought for. We have many years of experience, and have helped many satisfied clients through their divorces.
For more information regarding divorce in the state of Michigan, contact our Michigan Divorce Attorneys today! Our phone lines are staffed 24-7 and an attorney is on call for crisis intervention. Schedule your free initial consultation today by calling our main office at (517) 886-1000.