Category: Tax Consequences
Questions/Answers
Can my former spouse and I both claim the same child as a dependent on our U.S. Income Tax Return?
You cannot file a joint tax return with your former spouse for a tax year in which you were not married for the entire year. Your marital status is determined on the last day of the tax year. Thus, if you were divorced on December 31, 2010 you are required to file as single for 2010 and you must file a separate tax return. If filing separately, both parents cannot claim the same child as a dependency exemption on their U.S. Income Tax Return. The dependency exemption for a child will be awarded to the parent who has physical custody of the child for the greater number of overnights during the calendar year. If the child spends an equal amount of time with both parents, the parent with the higher adjusted gross income will be allowed to claim the dependency exemption provided the child is otherwise eligible to be claimed as a dependent.
Helpful Tips and Facts
Preparing the Qdro
How do I complete a QDRO? There are no two QDROs alike. Since almost all companies use QDRO processing centers, it is necessary to contact the company’s HR department to learn their preferred method of finalizing a QDRO. When drafting the QDRO it is best to follow each and every step suggested by the HR department and the QDRO processing company. 8 Steps to a completed QDRO Receive a Judgment Absolute; Contact the HR department where retirement plan(s) derived; Follow the plan administrators’ directions; Draft the QDRO; Have the plan administrator review / sign off on QDRO; Have each party review/ sign QDRO; Send to Court for approval; and Send Court’s signed QDRO to plan administrator.
Capital Gains Taxes on the Sale of Securities
When it comes time to split the assets, be careful if you decide to take the stocks or mutual funds. They may have a low cost basis, which will be carried over to you. When you go to sell them at some point down the road, you may be hit with a hefty capital gains tax. Before you split, look at the cost basis (what was paid) for any security that you are dividing.
Transfer of Marital Property
Generally, no gain or loss is recognized on a "Transfer of Property" from an individual to a spouse (or in trust for the benefit of a spouse) or, if the transfer is "incident to a divorce," to a former spouse. Exception: Transfers to a nonresident alien spouse are taxable even if the alien spouse is subject to U.S. Taxation in the year of transfer.
Colorado Child Support Dependency Exemption
In Colorado, the court may order, or the parties may agree, to allocate the dependency exemption for a dependent child between the parents for state and federal tax purposes as a part of any support order.
Head of Household Status
In order for a taxpayer to be entitled to claim "head of Household" status, the taxpayer must also be entitled to claim at least one dependent other than the taxpayer.
Keeping the Marital Home in a Divorce
In a divorce, the person awarded the marital home should be certain that he or she can afford to keep it. Houses generally appreciate, but when they do, the taxes on it increase when the property is reappraised. Many times, women who keep the marital home find themselves house poor. This can be difficult because when small children are involved, judges often try to keep the children in the family home.
Filing Taxes Jointly
Most married couples find it financially advantageous to file jointly as long as possible. Even though separated in anticipation of divorce, a couple who are legally married on Dec. 31 may file jointly.
The Marital Home and the Divorcing Woman
Very often in divorce, women end up with the family house. The appeal of the homestead is self-evident; however, the latent tax exposure is yet another reason to throw a cold eye of the arrangement. Remember, a house is a barren asset that pays nothing until it is sold. Even this ignores maintenance and property taxes. For a single woman struggling to keep her head above water, the tax exposure on the homestead warrants a second thought about keeping the house. That so called American Dream -- home ownership -- can become what one divorce lawyer calls a minefield affecting one spouse "unfairly and unexpectedly" when the total costs are calculated.
Assets Without Latent Capital Gains Liabilities
On the other hand, assets without latent capital gain liabilities include cash, certificates of deposit, treasury bills, deposit accounts, life insurance cash values, bonds, some portion of some annuities.
One Spouse Buying out the Marital Home
In divorce actions, the most common hypothecation of assets is the marital home. In this, one spouse buys out the other using a property settlement note. One spouse pays the other a sum for a negotiated length of time at current interest rates. Since the money is a division of property, it is not taxable. The recipient does pay taxes on the interest, not the principal. The note is normally collateralized by the home. Generally, the lender -- the spouse receiving the payment -- is not given title to the property.
Both Parents Claiming Same Child on Tax Returns
If both parents claim the same child as a deduction, the I.R.S. will notice and will audit.
No Tax Deductions for Child Support
Child support payments cannot be deducted by the payor, who is the noncustodial parent, nor can they be included as income by the recipient, who is the custodial parent.
Capital Gains
A 1997 revision in the tax laws permits each spouse to exclude up to $250,000 from gains taxes if her or she has lived in a house for two of the past five years. This is why determining the basis -- the amount originally invested in the property minus improvement -- is important. Gains are calculated on the basis.
Tax Ramifications
If you are going to be awarded the marital home in your divorce, you better have a clear understanding of what the tax ramifications are. If you do not consider capital gains or future capital gains you will be in for a big surprise. Without considering the tax ramifications, the value of the marital home will appear much greater.