- Divorce Court vs. Federal Tax Law
- Who Claims the Kids
- Custodial Parent
- Tax Liabilities
- Joint and Several Liability
- Alimony vs. Child Support
If you are in the midst of a divorce, if one is on the horizon, or if you are involved in a dispute with an ex-spouse over the terms of your divorce, you need to be aware that divorce agreements establish your rights related to each other under state law but do not bind those who are not parties to the divorce, including the IRS, to the terms of the divorce.
As a result, the IRS will follow federal law as it applies to a tax issue and ignore what the divorce decree specifies. Where there is a dispute between ex-spouses over the application of federal tax law and the divorce decree, federal tax law will prevail, and if one spouse feels they are paying more taxes than they are supposed to, their only recourse is to go back to state court and seek a monetary award. The following are some of the more common issues that may be encountered.
- Who Claims the Kids – A divorce agreement may state that the non-custodial parent is to claim the couple’s children as tax dependents. But federal tax law specifies that a child’s dependency exemption is to be claimed by the custodial parent unless the custodial parent specifically releases the child’s exemption to the non-custodial parent using IRS Form 8332. The release can be for one year at a time or for multiple years. Federal tax law defines “custodial parent” to be the parent with whom the child resides for the greater number of nights during the year. Just because the non-custodial parent is paying child support does not automatically give that parent the right to claim the child as a tax dependent.
- Custodial Parent – Generally, the IRS will not challenge who claims a child as long as only one person does so; there are some complicated tiebreaker rules for cases where both parents do attempt to claim the same child.
- Tax Liabilities – Sometimes the divorce decree will specify the amount of past or current joint tax liability that each spouse is responsible for paying. However, when married taxpayers file joint returns, both spouses are jointly and severally liable for the tax on that return. What this means is that one spouse may be held liable for all the tax due on a return, even if the other spouse earned all the income reported on that return. If one spouse pays more of the tax liability to the IRS than agreed to in the divorce proceeding, then that spouse must seek repayment from the other spouse in state court. The IRS won’t arbitrate the dispute or refund tax money to the spouse claiming to have paid a disproportionate amount.
- Alimony – Sometimes a divorce settlement will specify an amount that is for alimony and then stipulate that part of the alimony obligation is to be reduced when a child of the couple reaches a certain age. The IRS definition of alimony specifies that it cannot be designated as child support. Thus, even if the divorce decree describes it as alimony, the IRS will treat the specified reduction amount as child support, which is not deductible alimony.
These are just a few examples of the many tax issues that can arise as a result of divorce. Many times the breakup is hostile and the consequences are not considered to the benefit of both parties and the children, if any, and not all divorce attorneys understand the nuances of tax law in a divorce. If you have questions, please give this office a call.