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Lisa Marie Vari & Associates, P.C.
Manor Building, Penthouse Suite
564 Forbes Avenue
Pittsburgh, Pennsylvania 15219
Phone: 412-281-9906
Toll Free 1-866-PA-DIVORCE
Facsimile: 412-281-9908
info@pafamilylawyers.com

Appointments also available in Cranberry Twp., Robinson Twp., South Hills & Washington

Family Law Articles
Helping Us Help You

Stepping Back From Anger - Protecting Your Children
During Divorce

Tax Implications of Divorce and Support

PA Family Law
Divorce and Annulments

Equitable Distribution

Prenuptial and Postnuptial Agreements

Spousal Support, APL and Alimony

Child Support and Paternity

Child Custody

Grandparents' Rights

Contempt, Enforcement, Modification and Appeals

Stepparent Rights

Juvenile Law

Domestic Violence

Same Sex Couple Laws

Assisted Reproduction Cases & Surrogacy

News
News

Tax Implications of Divorce, Equitable Distribution, and Support Orders

When a husband and wife separate or divorce, a topic which is often overlooked by the parties is the impact of the separation or divorce upon each spouse's tax obligations.  With regard to the filing of tax returns, consideration should be given as to the filing status of each spouse, whether the spouses will itemize or use standard deductions if filing separately (both must use the same method), and which spouse will be entitled to claim certain deductions or exemptions.  Mothers and fathers who have never married or are now divorced should also consider and negotiate the various exemptions and deductions that are available as a result of their parenthood.  When negotiating the terms of an equitable distribution settlement, each spouse should consider the tax impact of being awarded certain assets especially if the assets will be liquidated.  Another consideration for those individuals paying or receiving any form of spousal support, alimony pendente lite, or alimony should be the tax impact of the payment or receipt of such monies. 

INCOME TAXES

Filing Status For Separated Spouses

Separated spouses should objectively determine the financially best way to file their taxes.  Normally filing a Married, Filing Joint Return will result in the lowest taxes; however, in doing so there must be a prior agreement on the contributions each spouse will make to any taxes owed and how the spouses will divide any refund.  Separated spouses will qualify to file under the Married, Filing Joint tax status until the year the divorce decree is entered. In the alternative, separated spouses may elect to file returns under the married filing separately status when filing separately, both spouses must either take the standard deduction or both must itemize.  Although the benefit in filing separately is only being responsible for taxes associated with your income, negatives include higher tax bracket and the fact that some credits and deductions are disallowed.  You should consult with a tax professional to determine which method is more advantageous.

Liability for Taxes Owed

If both spouses' names and signatures appear on a state or federal tax return, both are liable for the taxes. If a couple files jointly, the Internal Revenue Service generally holds each spouse responsible for the entire debt. This means that if the IRS conducts an audit and one spouse failed to accurately report their income or pay their income taxes, the other spouse could be liable for the taxes owed on a jointly filed tax return!

In some circumstances, a spouse who signed a joint tax return can be excused from liability if the spouse can prove that he or she is an innocent spouse. A wife or husband can be considered an innocent spouse if he or she did not know--and had no reason to know--that the tax return understated the true tax or that the incomes or other information on the return were inaccurate.  If a married person wants full protection against possible liability for inaccurate tax returns filed by his or her spouse, the best approach is to file a Married, Filing Separate return.

Tax Deductions

It is wise to have an agreement in advance which sets forth which party will claim the various deductions and exemptions so as to avoid confusion at tax filing time.Parents of minor children should consider which parent will be entitled to claim the dependency deduction for the children.  Without an agreement or order of court, generally the parent with primary custody is entitled to claim the children.  However, in many circumstances it makes good financial sense to award the dependency exemption to the non-custodial parent thereby increasing his or her net income and therefore the amount of support they are obligated to pay.Under certain circumstances, the amount of your legal and accounting fees paid which can be attributed to obtaining support may be tax deductible.Earned Income CreditIf your earned income and adjusted gross income is less than $30,030 with one qualifying child or less than $35,263 with more than one qualifying child or $11,750 if you do not have a qualifying child, you may be eligible for the earned income credit.  You may not claim the EIC if you file married filing separately.  See IRS publications for additional qualifications.

Child Care Credit

A parent may be able to take this credit if that parent paid someone to care for his or her child.  Parents who pay child support under an order that includes his or her contribution for day care should consult with a tax professional regarding whether they may take the child care credit.  You cannot claim this credit if you file married filing separately.

Child Tax Credit

 The child tax credit can be up to $1,000 per child. To qualify for the credit you must have at least one qualifying child. According to the IRS a qualifying child for the purposes of the child tax credit is a child who:
  1. is claimed as your dependent and
  2. was under age 17 at the end of the tax year and
  3. is your son, daughter, adopted child, stepchild grandchild or foster child and
  4. is a UScitizen or resident alien. 
  5. there are other requirements related to how much time the child spends in you household.  You should consult with a tax professional regarding whether you are entitled to claim this credit.

    6. Spousal Support, Alimony pendente lite, Alimony, and Child Support Orders

    If you either pay or receive spousal support, alimony pendente lite, or alimony you will need to be concerned with the potential tax ramifications of these sums.  If a spouse receives spousal support, APL, or alimony, the amount received usually is treated as income to the recipient and a deduction from income of the person paying the money. Furthermore, if one of these orders also contains an additional amount for child support, the entire amount received, including the child support component, may be considered income to the recipient for tax purposes unless the order of court states otherwise. If the order is solely for child support, there are no tax consequences for the receipt or payment of the money.

    TAX CONSEQUENCES OF EQUITABLE DISTRIBUTION ORDERS AND MARRIAGE SETTLEMENT AGREEMENTS

    The Marital Residence

    Most often, the marital residence is the most expensive jointly-owned asset. Divorcing couples can sell the home now and divide the proceeds immediately, do this at a future date, or have one spouse buy out the other's interest in the property. The parties may qualify for an exclusion of the gain associated with the sale.  Married tax payers may qualify for a $500k exclusion if: 1.  joint return filed for year of sale; 2. at least one spouse has owned residence for two out of 5 prior years; 3.  both parties satisfy a 2 out of 5 years use requirement; or 4. various other requirements are satisfied.

    If the marital residence is going to be sold, property transfer taxes are generally paid by the person selling the house. If either spouse knows that a sale may be required because they cannot financially afford to maintain the marital residence, it is best to sell the marital residence prior to the finalization of the divorce so that both spouses share the expense of the transfer taxes and other costs associated with sale.

    Mutual Funds, Stocks, Bonds, Artwork and Other Appreciating Items

    Many couples collect items during their marriage that will need to be divided during the course of a divorce. If any of these items are appreciating assets, their division should be carefully considered in light of the capital gains tax. For example, suppose a couple purchased stock some time ago for $50,000 and now, after accumulating value, it is worth $100,000. Because of a divorce, this stock is sold and divided. The capital gains tax would be applied to the profit the stock generated since its purchase, in this case $50,000.

    On the other hand, suppose one spouse wants to keep the stock. In this case, they must purchase the other spouse's share and they pay the other spouse $50,000. This makes the buyer's total investment into the stock shares $75,000. However, for capital gains tax purposes, it doesn't matter that the buyer actually invested $75,000; the government will consider the original cost basis of $50,000 in determining any capital gains tax.  Meanwhile the $50,000 paid to the other spouse goes to them tax-free.

    Retirement Funds

    Often, retirement accounts are the second largest marital asset. Tax laws regarding qualified retirement plans like 401Ks are very strict and govern not only who receives the distributions, but also how they are handed out.

    When divorce occurs, your ex-spouse may be entitled to some portion of your retirement plan. Divorcing couples must usually draft a Qualified Domestic Relations Order (QDRO) in order to distribute the non-participating spouse's share of the retirement plan.

    IRAs function somewhat differently than qualified plans. If there have been contributions during your marriage, your spouse will have rights to some of the IRA assets. Such assets can be transferred tax-free by a written divorce decree. If you are the recipient of transferred IRA assets, be sure to have the funds rolled immediately into your own IRA. If you don't, you could be hit with a 20 percent withholding penalty for federal income tax.

    CONSULT A TAX PROFESSIONAL

    Please consult a tax consultant familiar with family law issues before relying on any information contained in this website.  IRS Rules and Regulations change frequently and the information listed may be inaccurate according to the latest IRS amendments.

    SCHEDULE AN APPOINTMENT

    Our office conducts appointments in our Allegheny County offices located in downtown Pittsburgh and in Whitehall borough as well as our Butler County office located in Cranberry Township.  In some circumstances, telephone appointments are available.  Our office accepts Pennsylvania family law cases including divorce, equitable distribution, spousal support, alimony pendente lite, alimony, paternity and child support matters, child custody cases, juvenile law cases, and related matters in Allegheny County (Pittsburgh), Beaver County, Butler County, Washington County, and Westmoreland County (Greensburg).  Our law firm accepts Pennsylvania family law cases from other Western Pennsylvania counties including Armstrong County (Kittanning) Clarion County, Fayette County, Greene County, Indiana County, Lawrence County, Mercer County, Somerset County, and Venango County on a case-by-case basis. To schedule a consultation, click here . 
 
LMV & Associates  


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Divorce and Annulments : Equitable Distribution : Prenuptial and Postnuptial Agreements : Spousal Support, APL and Alimony : Child Support and Paternity : Child Custody : Grandparents' Rights : Contempt, Enforcement, Modification and Appeals : Stepparent Rights : Juvenile Law : Domestic Violence

The attorneys at the law offices of Lisa Marie Vari & Associates, P.C. are available to help families and individuals who have cases in Allegheny, Armstrong, Beaver, Butler, Fayette, Greene, Indiana, Lawrence, Somerset, Washington and Westmoreland counties including communities such as: Aliquippa, Ambridge, Baden, Baldwin, Beaver, Beaver Falls, Bell Acres, Bellevue, Bentleyville, Bethel Park, Blawnox, Brentwood, Brownsville, Burgettstown, Butler, California, Canonsburg, Carnegie, Centerville, Cheswick, Clairton, Claysville, Collier, Coraopolis, Cranberry Township, Crescent, Darlington, Donora, East Deer, Economy, Edgeworth, Elizabeth, Findlay, Finleyville, Forward, Fox Chapel, Franklin Park, Gastonville, Gibsonia, Greensburg, Greentree, Grove City, Hampton, Harmar, Hickory, Hookstown, Houston, Indiana, Jefferson Hills, Kennedy, Kilbuck Ross, Latrobe, Lincoln, Lyndora, Marianna, Mars, Marshall-Bradford Woods, McCandless, McDonald, McMurray, Meridian, Midland, Monaca, Monessen, Monongahela, Monroeville, Moon, Mount Oliver, Munhall, Murrysville, New Brighton, New Castle, New Eagle, New Kensington, North Fayette, North Versailles, O'Hara, Oakdale, Ohio Township, Ohioville, Penn Hills, Pine, Pleasant Hills, Plum, Port Vue, Rankin, Richland, Rochester, Scenery Hill, Scott, Sewickley Heights, Shaler, Slippery Rock, South Fayette, South Park, Springdale, Stowe, Tarentum, Uniontown, Upper St. Clair, Valencia, Washington, West Deer, West Elizabeth, West Mifflin, West View, Wexford, White Oak, Whitehall, Wilkins and Zelienople.