Tax Implications in Divorce Financial Planning

Question 1

When is marital status determined for taxes?

Answer 1

Last Day of tax year

Question 2

When is couple considered divorced for tax purposes ?

Answer 2

1. Final divorce decree issued
2. There is a legal separation under local law requiring couple to live apart
   OR
3. Married individual qualifies as abandoned spouse (section 7703b)

Question 3

What is an abandoned spouse (4 reqs) and section ?

Answer 3

Section 7703 b.
when all conditions are met -
1. Abandoned spouse pays more than 1/2 cost of maintaining their household for the tax year
2. Individual files a separate tax return
3. Individuals household is the principal home of a dependent child for >6 months of tax year and individual is entitled to claim the dependency exemption
4. Individual lives in sep residence from spouse longer than 6 months of tax year

Question 4

How to qualify as HOH (3 reqs) ?

Answer 4

1. taxpayer NOT married or legaly separated and hasnt lived with spouse for last 6 mo of year
2. taxpayer pays more than 1/2 of household
3. taxpayers child qualified as dep and lives with taxpayer more than 1/2 the year

Question 5

After divorce, what are your filing options ?

Answer 5

NOT MARRIED! you can file single or HOH

Question 6

What is a legal separation ?

Answer 6

When they go to court and set terms under which they’ll live separately. They aren’t considered married for tax purposes but CAN’T remarry. It is NOT common

Question 7

How are income and deductions calculated in year divorce is final in equitable distribution state ?

Answer 7

Income taxable to person that earned it and income from property taxable to property owner as determined by state law. If jointly owned, income taxed 50% to each spouse according to ownership proportion.

Question 8

How are income and deductions calculated in year divorce is final in community property state ?

Answer 8

TWIN CAN LAW - former spouses report their share of community income up until the divorce is final (split in half for tax purposes), and report separate income from the date the divorce is final through last day of tax year

Question 9

Exceptions to community property rules

Answer 9

1. All conditions must be met to treat community property as separate
2. Legally married spouses live apart at all times during year
3. Didn’t file joint return
4. No portion of income is transferred between spouses during tax year
5. If spouse fails to include because they didn’t know (joint income not filed. they had no knowledge)
6. IRA can deny community treatment to spouse who didn’t notify other spouse and all their income

Question 10

Innocent spouse rule

Answer 10

Relief from liability for spouse that signed joint tax return and has no knowledge of understatement of tax (most useful when one spouse is self employed) to qualify
1. Joint return was filed
2. Understatement of tax attributing to erroneous items from one spouse
3. In signing return they didn’t know and had no reason t know
4. It would be inequitable to hold responsible 5. Innocent spouse elects no later than 2 years after collections start

Question 11

Depreciation Recapture

Answer 11

Provisions: The owner may elect to deduct the cost (expense) of certain types of trade or business property in the year the property is purchased, subject to certain limitations based upon the cost of the property and trade or business income [IRC §179].

Question 12

IRC § 72(t)2(c)

Answer 12

This section of the IRS Code allows the alternate payee to receive money from a qualified plan, pursuant to a QDRO, without having to pay a 10% tax penalty. The distribution would still be subject to ordinary income tax and the custodian must withhold 20%