For a divorced individual – particularly a divorced parent – advice from a paid tax preparer about some special tax rules is critical. Divorcing couples reach agreements about debt allocation, alimony, and child custody. But the IRS is not bound by any of the terms of a divorce settlement.
One of the critical elements addressed upon divorce is who pays any joint tax liability. This includes the current year, a return not yet filed for the preceding year, balances owed for past years, and potential IRS assessments for any year during the marriage. No matter what a divorce decree states, the IRS can pursue either spouse for jointly incurred taxes.
When a person is wrongfully pursued for back taxes, innocent spouse relief is available. Assistance from a professional in the tax preparation business is usually needed to conduct the proper filing. An innocent spouse request is only available following 12 months of divorce or separation.
Accurate tax preparer work is very important in the year of divorce. Many new tax consequences are encountered for a divorced individual. Firstly, alimony payments are tax-deductible for the payer and taxable income to the recipient. Such payments must be ordered by a court or required by a legally binding written agreement between the former spouses.
Maintenance and spousal support payments also qualify for tax treatment as alimony. Therefore, even residents of states without alimony awards can incur taxable events from court-awarded spousal maintenance. However, IRS tax preparer study reveals that other financial transfers between divorcing spouses have no tax impact.
Because of the taxable nature of alimony, expenses incurred to secure or collect it are tax deductions. In fact, any tax advice related to divorce is tax-deductible. Legal and accounting fees are not deductible when unrelated to tax matters.
Unlike alimony, child support payments have no affect on tax returns. Payments are not deductible by payers or taxable income for receiving parents. Divorce decrees requiring payment of combined alimony and child support should distinguish between the two. Unfortunately, many do not.
Child support is of course intended for a child in the custody of one parent. Regardless of who pays for support of the child, the custodial parent is entitled to claim a dependency exemption upon tax return preparation. However, the custodial parent may permit the other parent to claim the exemption while still retaining certain tax benefits.
Only the parent claiming an exemption is entitled to the Child Tax Credit. However, the custodial parent is entitled to significant advantages that are known to professionals with tax preparer certification. Among these is the potential for the custodial parent to claim Head of Household filing status and use the child as a qualifying person for the Earned Income Tax Credit.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.