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I came across a good article on tax considerations that one should consider when involved in a divorce. Of course, you should always consult a divorce lawyer and accountant in your particular state when applying these considerations to your particular circumstances. The article was from DivorceHQ.com.
FILING STATUS
How are you going to file your taxes. Determine the best way financially to do this. Normally filing a Married Joint Return will result in the lowest taxes. Do not look at a joint return as any kind of “attachment” to your spouse. This is strictly a financial situation. You qualify for the Married Filing Jointly status if you are not yet divorced. You do not qualify for this status in the tax year you were divorced.
EXEMPTIONS
You may claim a child that does not live with you only if it is stated in your divorce or separation agreement or if mutually agreed upon. This does not apply if you and your spouse are filing a Married Joint Return (see above).
DEDUCTIONS
Under certain circumstances, the amount of your legal and accounting fees paid which can be attributed to maintaining or preserving income (not child support) may be tax deductible.
ALIMONY
If you either pay or receive alimony/maintenance there are tax ramifications. Alimony/maintenance (not child support) is taxable to the recipient and deductible for the payer. Occasionally a dispute will arise as to how much alimony was paid/received. Sometime the IRS will question the alimony amounts. For that reason it is very important to keep good records. If you fail to keep adequate records you may lose the alimony tax deduction.
If you pay alimony you should keep the following records for at least three years:
Original checks. Be sure to show on each check the month the payment represents.
A list that shows the date, check number, amount and address where payment was sent.
If you give cash obtain and retain a receipt signed by both the payer and the recipient.
If you receive alimony you should keep the following for at least three years:
A photocopy of the check or money order received.
A list that shows the date, check number, amount of payment, bank account the funds are drawn on, account number against which the check is drawn on.
A copy signed receipt with signatures of both payer and recipient for any cash payment received.
CHILD SUPPORT
Is not taxable nor is it deductible.
EARNED INCOME CREDIT
You may be eligible for the earned income credit (EIC) if:
You have more than one qualifying child and your earned income was less than $37,783 ($39,783 if married filing jointly),
You have one qualifying child and your earned income was less than $33,241 ($35,241 if married filing jointly), or
You do not have a qualifying child and your earned income was less than $12,590 ($14,590 if married filing jointly)
For more information on the Earned Income Credit see IRS Publication 596
CHILD AND DEPENDENT CARE CREDIT
If you paid someone to care for your dependent under age 13 or your disabled dependent or spouse so that you could work or look for work, you may be able to claim the Child and Dependent Care Credit on your tax return.
To qualify for the Child and Dependent Care Credit you must:
Have paid for care expenses in order to earn taxable income. If you are married both spouses must work either full or part time. Spouses who are full time students or incapacitated are excepted.;
Pay more than 50% of the household maintenance costs for a qualifying dependent;
File your tax return jointly if married, unless the separation rules apply;
Hire someone other than your child (under age 19 at the end of the tax year), your spouse, or a person you can claim as a dependent;
Have qualifying expenses over and above any tax free reimbursements from your employer;
Report on your tax return the name, address, and taxpayer identification number of the child care provider. If the care provider is a tax exempt organization the taxpayer identification number is not required.
Employment-related expenses that qualify for the Child and Dependent Care Credit include household services and expenses for care of the qualifying individual. Expenses of attending a daytime summer camp qualify for the Child and Dependent Care Credit if that is a reasonable means of providing care during working hours. However, overnight camp expenses do not qualify for the Child and Dependent Care Credit. A nursery school generally qualifies for the Child and Dependent Care Credit, though an elementary school does not qualify for the Child and Dependent Care Credit.
Child and Dependent Care Credits are allowed for $3,000 of expenses for one dependent’s care and $6,000 for more than one dependent’s care.
In order to claim the Child and Dependent Care Credit you must maintain as your principal home a household for at least one of the following qualifying persons who live with you:
A child under 13 years of age whom you claim as a dependent;
Your spouse if your spouse is physically or mentally incapable of caring for himself or herself;
A person who is physically or mentally incapable of caring for himself or herself regardless of age
For more information on the Child and Dependent Care Credit see IRS Publication 503
CHILD TAX CREDIT
If you have children who are under age 17 as of the end of the tax year, you can get a $1,000 tax credit per child on your tax return. A tax credit reduces your tax bill dollar for dollar, so three qualifying children, for example, can cut what you owe Uncle Sam by $3,000. The credit may be limited if your income exceeds a certain level. And the credit does not affect the exemptions you take for dependents. The credit is in addition to your exemptions.
To qualify for the Child Tax Credit you must meet these tests:
The dependent must be a U.S. citizen or resident. You can claim your child, stepchild, adopted child, grandchild or great-grandchild. Under a new definition of a “qualified child,” you can also claim the credit for siblings, step-siblings and half-siblings that live with you. Foster children qualify if they were placed with you by a court or authorized agency. To claim the credit, children must live with you more than half the year and must not provide more than half of their own support.
You must report each qualifying child’s tax identification number (TIN) (usually the child’s Social Security number) on your return.
For more information on the Child Tax Credit see IRS Publication 972
INCOME TAX EVASION BY SPOUSE
If your spouse knowingly cheated on your joint return to evade taxes, you might not be held responsible. Effective July 22, 1998 a new tax rule went into effect whereby if you are divorced, legally separated or have been living apart from your spouse for at least 12 months, and you were unaware that your spouse lied on your joint tax return, you can file papers that would compute your tax liability separately. If you have been audited and you believe this rule applies to you contact a tax specialist who has experience with this type of matter.
Source: DivorceHQ.com
Going through a divorce is a life-altering event, both personally and financially. Along with the personal relationship that exists within a marriage, there is also a financial relationship, and a financial marriage. I came across a financial information blog titled Ask the Advisor, who published an article that deals specifically with the impact of a divorce on your finances and your credit.
1. Assess Your Responsibilities : You need to be aware of all the accounts you are responsible for, including bank accounts, mortgage loans, credit cards and utilities. Even if you and your spouse have decided who gets what property, you need to make sure that the right person is solely responsible for their respective belongings.
2. Dissolve All Joint Accounts : Rather than trying to divvy up what is owed on your joint accounts and asking your ex to honor their half, you should remove the right person’s name from the accounts or cancel them completely. Make sure the both of you do the canceling together, legally. The first place to start is the bank, as most couples share checking and/or savings accounts when they are married. Also, if you are taking possession of one car with both of your names on the note, have your spouse’s name removed. Make sure that your spouse does the same thing with any property they take. (If you are still paying for any of this property, then you may have to refinance to get the loan down to one name.) Any bills you paid together, such as your utilities, should be put in one name. As for credit cards, you can try to work with the credit card company and have them transfer half of the balance to two different accounts in anticipation of the divorce.
3. Sell the House : A common mistake that people make is giving their house to their spouse after the divorce. This may be due to abandonment or perhaps a well-intentioned arrangement because there are children involved. However, the best thing to do is to sell the house together and divide the profit. After all, no one can predict the future. Countless divorcees have found their credit ruined because their ex let their house go into foreclosure. Explaining to creditors that you are now divorced won’t make you any less responsible for a mortgage with your name on it.
4. Divide Any and All Shared Cash : In the process of allocating debt, canceling accounts and selling property, you and your spouse will probably be left with some liquid assets. You should, perhaps with the assistance of your divorce lawyers, fairly divide that cash before you walk out of each other’s lives. This is the legal, sensible and ethical thing to do.
5. Document Everything : Once the courts become involved and your divorce is finally underway, make sure that all of your financial arrangements and agreements are documented. That way, if there are any discrepancies down the road (such as a creditor bugging you about your ex’s car payments), you can refer anyone to your official court records. While this may not be a surefire way to get a collector off of your back in a timely manner, you will have the law on your side and the means to protect or restore your credit.
Source: “How Will My Divorce Affect My Credit?” by Jimmy Atkinson, published at Ask The Advisor.
Welcome to the West Virginia Family Law Blog, authored by myself, John H. Bryan, a West Virginia Attorney practicing in divorce and child custody cases in southern West Virginia. This is actually my third (and last) blog. I spend most of my time authoring the West Virginia Criminal Law Blog, which can be found here. I also maintain the West Virginia Car Accident Law Blog, which is more of an informative site and resource, as this one will be. Please feel free to contact me by email at jhb@johnbryanlaw.com, or visit my website at johnbryanlaw.com.
