General Tax Considerations in a Georgia Divorce
Mr. Hippe is not a CPA or a tax attorney. Accordingly, he will not provide his clients with any specific tax advise or counsel, nor will most domestic lawyers. You should consult your CPA, or a CPA experienced in divorce tax issues, as soon as you are even beginning to think about divorce. And depending on the financial complexity of the case, and the size of the marital estate, if the divorce is clearly going to be contested, it may be wise to engage a CPA as an expert and a formal part of your legal team. Below are some very general divorce tax rules and principals to consider.
1. Child Support: Child support payments, whether temporary or permanent, are not deductible to the payor or charged as income to the recipient.
2. Dependency Exemption: Absent an express agreement to the contrary, after the divorce is final, the custodial spouse (the spouse with more than 50% of the parenting time) will have the right to claim the dependency exemption for any and all children. (A trial court has no authority to award any dependency exemption to a parent who has less than 50% of the parenting time.) The parties, however, can agree to share or rotate this exemption in a settlement agreement.
3. Periodic Alimony: As a general rule, absent an express agreement to the contrary, periodic monthly alimony payments paid from a cash account (via check / electronic transfer) while the parties are living separate are considered income to the recipient spouse and a tax deduction to the paying spouse. Further, third party payments for the benefit of a spouse, such as the mortgage payments on the marital home, utilities, upkeep expenses, property taxes, medical expenses or insurance premiums, etc. can be argued taxable alimony as well. The parties must carefully consider the tax treatment of any such payments in any separation agreement or temp. consent agreement or in the final settlement agreement.
4. Property Division: Transfers incident to divorce are generally tax neutral - neither gains nor losses are recognized on the transfer of property between spouses or between former spouses incident to a divorce - provided the transfer is timely (apparently within five to six years from the finalization of the divorce provided this time frame is clearly noted in the settlement agreement - a CPA should be consulted on this). If a retirement account is being divided, careful language in the settlement agreement and QDRO must be used to ensure the transfer will not trigger any early withdrawal penalty. (The transfer should be to another qualified retirement vehicle.)
5. Joint Returns? As parties are jointly responsible for any and all tax debt on a joint return, divorce lawyers commonly counsel their clients to be very cautious in signing any joint return after separation. You can file "married filing separate" for the year or years of separation. However, where you can trust the income reported by your spouse (where spouses are both W-2 employees and have historic records and consistent returns for example), a joint return can save tax dollars and should be considered. If a divorce is not yet final for a particular tax year, some spouses will file a joint return and wait to file separate returns for the year the divorce is final.
6. Final by End of Year? There may be some tax advantage to having your divorce completed before the end of the year, if possible. For example, there may be a tax advantage in the following year to file "separate" vs. "married filing separate". Further, a party may qualify for a lower income tax rate as a "head of household" if he or she is not married at the end of a tax year and maintains a household within the meaning of the tax statute. Again, a CPA must be consulted, and the consultation must be had well in advance of year end. A divorce order cannot be entered immediately upon filing of a settlement agreement. In Georgia, a minimum of 31 days must elapse. And, considering how busy court systems are, at least another 30 days should be allowed.
7. Attorney's Fees: As a general rule, your attorney's fees and other expenses of divorce (such as guardian expenses) are considered personal expenses and are not deductible. However, there is a possible exception for the spouse who successfully secures periodic alimony (taxable income). It appears that expenses incurred in the successful pursuit of taxable income are potential deductions as apparently are expenses associated with tax advice in the divorce. It is unclear whether the legal expense of defending an alimony claim can be deducted. And, if you are seeking alimony, you need to ask your attorney, at the beginning of the case, to attempt to parse out, as best he or she can, the time spent in pursuit of the alimony claim vs. other matters in the divorce, such as custody.
8. Tax Assets? If the IRS owes your or your husband a refund from a return filed during the marriage, this is a possible marital asset. Further, if you or your spouse have engaged in any sophisticated tax strategies (such as purchasing tax credits or aggressively depreciating marital investment property), this must be considered. Lastly, you must consider if either you or your husband have tax losses that can be carried forward against future income or that can be carried back to generate a cash refund. If so, these may be marital assets.
9. Mortgage Interest Deductions: The party entitled to take the mortgage interest deduction on the marital residence should be clearly addressed in any separation agreement, temp. agreement, consent order, or final settlement agreement. Absent an agreement, a spouse is entitled to the deduction if a spouse is the debtor on the mortgage loan and is still on title. If both spouses are co-debtors on the mortgage encumbering the primary residence, this is ordinarily shared 50/50 or otherwise negotiated. (If you are the co-borrower, you may need to check with a CPA to confirm that you are entitled to at least half of the deduction.) If a spouse who is a debtor on the mortgage is conveying his or her interest in the marital residence to the other spouse via Quit Claim Deed or otherwise, any continued claimed deduction by this spouse must be carefully addressed.
10. Understanding Alimony Deduction Recapture Rules: If you are committing to significant periodic alimony, you need to consult a tax professional familiar with the IRS "recapture" rules. If the IRS believes that there is significant "front end loaded" alimony (which has a potential tax advantage if there is income disparity between the spouses) paid in lieu of property division (which is tax neutral), the IRS can seek to "recapture" this deduction. You need to fully understand these rules before you make any such commitment.