Important Note: Tax issues are complex and difficult to generalize. I.R.S. regulations change frequently. The information in this article is provided as a starting point. Please read the linked publications to make sure that the general statements apply to your tax situation. Please discuss the tax impact of your divorce issues with a tax professional.
Link to PDF File Publication 504 "Divorced or Separated Individuals."
Filing Status.
Unless the parties are married on the last day of the tax year (i.e. December 31st), they are not eligible to file a joint tax return for that tax year. If the parties are married on the last day of the tax year, they are eligible to file married (jointly) or married (singly).
Alimony is treated as taxable income for the receiving spouse and is a deductible expense for the payor spouse. Link to IRC Section 71.
Exemptions and Deductions for Children.
The dependent child exemption is assignable from the primary custodian of the child if the custodial parent signs a Form 8332 (release of exemption). Link to IRS Publication 503: Dependent Child Exemption. The child care (i.e. day care) credit is not usually assignable and must stay with the parent with whom the child primarily resides. A separate tax credit is the Child Tax Credit, which can be claimed by anyone who is entitled to "claim a child as a dependent."
Property Transfers.
Transfers of property (including the marital residence) from one spouse to the other "incident to a divorce" are generally non-taxable events. Spousal transfers incident to divorce are treated like gifts so the spouse receiving the property receives the "adjusted basis" (baseline valuation) of the spouse transferring the property for the purpose of figuring gains and losses in the future. IRC Section 1041. Link to IRS Publication 504: Transfers Between Spouses.
Sale of Principal Residence.
Pursuant to the Tax Reform Act of 1997, there is a $250,000 exclusion of capital gain per spouse ($500,000 per couple) on a principal residence sold after May 6, 1997 provided that you resided for the residence for 2 out of the last 5 years (or less if you rolled in the gain from a prior principal residence). This is not a "one time" exclusion as was provided under prior law; you may apply the exclusion to one home sale in a two-year time period. Link to IRS Publication 523 Sale of Your Home, Excluding the Gain.
Spouses have individual, not joint, interest in tax refunds. Unless otherwise agreed to, the overpayment is allocated according to the amount of tax paid by each spouse. IRS Revenue Ruling 74-611.
"Innocent spouse" rules allow spouses to apply to the IRS to disengage from joint tax returns and obtain protection from joint liability (civil and criminal) if they suspect the other spouse has not been honest in filing joint returns. The Innocent Spouse Rule of the IRS Restructuring and Revision Act of 1998 provides that where:
- The parties have filed a joint return;
- That as a result of the gross misstatements of one spouse, there is an understatement of tax due;
- The innocent spouse can demonstrate that he or she signed the return not knowing about the understatement;
- It would be inequitable to hold the innocent spouse liable for the deficiency taking all the circumstances into consideration.
There are more detailed explanations as to specific types of misrepresentations and what constitutes an understatement contained in the rules. There are time limitations for filing with the IRS for innocent spouse protection. Link to IRS Publication 971: Guidelines (Acrobat PDF file). Link to an article describing the new rules.
