Divorce and Tax: No Shelter for the Weary

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CHAPTER 11DIVORCE TAX NO SHELTER FOR THE
WEARY
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Chapter 11
Divorce Tax No Shelter for the Weary

• Tax Ramifications of Divorce and Separation
• What the IRS does
• Susan Learns a Tax Tip
• Tax ramifications of alimony v. child support
• How to Research a Tax Tip
• Internal Revenue Code
• Section 71(b)

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Chapter 11
Divorce Tax No Shelter for the Weary

• The Six IRS Must Haves
• Payment must be in cash
• Cash must be paid directly to the payee
• Payments are allowable as a deduction if
  permitted under a written and signed agreement
• Payments considered
• Tax deductible if not living to together
• Non-Tax deductible if living together
• Differentiate between support payments and
  property settlement
• Payments cannot be disguised as child support

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Chapter 11
Divorce Tax No Shelter for the Weary

• Attempting to Disguise Child Support
• Child support is not tax deductible
• Alimony and spousal support is tax deductible
• Reduction in alimony
• The Recapture Rule
• Tax Consequences of Transferring Property
• Transferring property
• How capital gains tax works

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Chapter 11
Divorce Tax No Shelter for the Weary

• Transferring Property to a Third Party
• Beneficiary spouse
• The IRSs three requirements
• Transfer is made pursuant to a divorce or
  separation agreement
• Transfer is made pursuant to a written request of
  the beneficiary spouse
• Transferring spouse receives a written acceptance
  of the property transfer after the property has
  been transferred

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Chapter 11
Divorce Tax No Shelter for the Weary

• Retirement Plans and Property Settlements
• Some types of retirement plans
• Pensions
• Individual retirement plans
• Profit sharing
• Keogh plans
• 401K plans
• 403B plans
• Understanding Qualified Domestic Relations Orders
  
• Purpose of a QDRO

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Chapter 11
Divorce Tax No Shelter for the Weary

• Steps to Take When Seeking Retirement Benefits
  for an Alternate Payee
• Get the plans instructions before having the
  Judge sign the order
• Preparing a Qualified Domestic Relations Order
• Review the example (Exhibit 131)

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Chapter 11
Divorce Tax No Shelter for the Weary

• Which Spouse is taking the Dependency Exemptions?
  
• Dependent exemption
• Who is entitled to receive the benefit?
• What needs to be signed if the other parent is
  permitted to take the deduction?
• IRS Form 8332
• Are Legal Fees Tax Deductible?
• Legal fees in connection with a divorce or
  separation are not deductible
• Tax advice is tax deductible

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Chapter 11
Divorce Tax No Shelter for the Weary

• Whos Head of the Household Now?
• Head of Household
• Person who pays for over half of the costs for
  maintaining a household without children
• Three step test if children are involved
• Claiming spouse must provide over half the costs
  of maintaining the household
• The house must have been the childrens main
  residence during the tax year
• The former spouse could not have lived in the
  household during the last six months of the tax
  year

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Chapter 11
Divorce Tax No Shelter for the Weary

• Tax Ramifications of Selling the Marital Home
• Capital gains taxes
• One Option is Filing Separately
• Married, filing separately
• Higher tax bracket
• Review Tax Clauses (Exhibit 132)
• Does Declaring Bankruptcy End a Support
  Obligation?

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Chapter 11
Divorce Tax No Shelter for the Weary

• Ethics Alert
• Do e-mails automatically convey client status?