While most divorcing spouses are laser-focused on the date their divorce will become final, many underestimate the importance of their date of separation. Often these two dates occur months – or even years – apart. Yet, the date of separation can have a dramatic impact on many financial aspects of the divorce.
The date of legal separation is generally considered the date the spouses no longer lived together as a married couple, although each state may slightly vary this definition. The date of separation is often obvious – either one party moves out of the marital home or the parties agree to a set date, sometimes the court must make the determination.
So why is the date of separation so important?
Barring any prenuptial agreements or state law to the contrary, the income earned by a spouse during the marriage is considered marital property, subject to division between both spouses. However, any income earned by either spouse after the date of separation is generally treated as separate property. This means that if one spouse wins the lottery or receives a large bonus before the date of legal separation, the other spouse is entitled to a portion of that income.
Things can get complicated if one spouse receives income after the date of separation but before the date of divorce. In those cases, the courts will look to when the received income was earned to determine if it is marital property. In some cases, even money received after the date of legal separation but earned before that date will be subject to division.
Did you know that, in America, there is one divorce about every 36 seconds? That’s nearly 2,400 divorces per day, 16,800 divorces per week and 876,000 divorces per year.
With tax season upon us, that means approximately 876,000 people are newly navigating the realm of post-divorce taxes. Taxes are complicated enough as it is, but when you add in assets, dependents, alimony, child support and other freshly split obligations, filing can be downright daunting.
Here, the five most important things to keep in mind when facing this new challenge.
1. Marital status is set as of Dec. 31, not April 15
If your divorce was finalized after Jan. 1 but before you filed your taxes, you are still officially married as far as your 2014 taxes are concerned. In other words, your marital status as of Dec. 31 determines your filing status for that entire calendar year.
Although you cannot file jointly, you may be able to file as a head of household, depending on particular qualifiers such as length of cohabitation, cost of home upkeep, et cetera.
2. Home is where the taxes are
Upside: You don’t have to pay taxes on transferred property in a divorce, and if you’re retaining the residence, you can claim the mortgage interest deduction.
Downside: Now that you’re single, capital gains exclusion laws work less to your advantage. As a result, if you eventually decide to sell your home, your profit from the sale may be significantly reduced.
3. Alimony is tax deductible, with some caveats
In most cases, alimony is tax deductible for the party paying it; in fact, it’s an above-the-line deduction, meaning it does not need to be represented as an itemized claim. However, a few conditions should be kept in mind:
Alimony payments made while both parents of the child are still living together are not tax deductible.
While cash, checks and money orders meet alimony standards, property contributions do not.
4. Custodians clean up on tax returns
Modern custodial agreements rarely designate a sole custodian, which makes taxes a little more difficult. Typically, the custodial parent is considered, by default, the parent who has physical custody for most of the year. However, many couples now alternate who claims custody each year in order to share the tax benefit.
Also, keep in mind that child support is always tax-neutral, which means that even if you’re paying it, it is not tax deductible in any way.
There’s one little loophole, however. If you continue to pay a child’s medical bills, even without custody, those costs can be included as a medical expense deduction.
5. Be careful with your 401(k)
Your retirement should be handled with the same care it took to earn it. Cashing out a 401(k) to use in a settlement is subject to taxes; however, this tax trap can be avoided if the transfer is done under a qualified domestic relations order, or QDRO. A QDRO grants your ex-spouse the right to the funds without the imposition of taxes.
As always, if you have any doubts about how to file your taxes due to a divorce, contact your attorney and your accountant. They are best qualified to give advice for your unique situation.
As if divorce doesn’t cause enough emotional and financial turmoil, every person going through a divorce must also consider a variety of tax issues that arise once a marriage ends. Many of these issues can catch a divorcing spouse off guard. It is important to understand these tax pitfalls in order to make sound decisions and avoid unnecessary troubles down the road.
Alimony is Taxable to the Recipient
With some exceptions, spousal support paid by one party to the other is usually considered a taxable event for both. This is crucial to understand because it causes a tax liability for the payee spouse and a tax credit for the payor spouse.
The IRS sets forth specific criteria in order for a payment between spouses to qualify as alimony:
The spouses do not file a joint tax return with each other
The payor spouse pays in cash (including checks, bank transfers or money orders)
The payment is received by (or on behalf of) the payee spouse
The divorce or separate maintenance decree does not state that the payment is not alimony
If legally separated, the former spouses are not members of the same household when the payment is made
There is no liability to make payments after the death of the payee spouse
The payment is not treated as child support or part of a property settlement
Who Gets the Dependency Exemption for the Minor Child
The IRS presumes that the custodial parent will receive the dependency exemption for any minor children of the divorcing couple. A custodial parent is defined as the parent who has the minor children for the greater portion of the calendar year. This presumption can create a situation where one parent always gets the deduction, year after year, providing significant tax savings to him or her.
However, the dependency exemption can be allocated by agreement of the parties or by court order. In such cases, the parent relinquishing the dependency exemption is required to sign IRS form 8332, which is then attached to the non-custodial parent’s tax return in each year that he or she claims the exemption.
Before moving out during divorce or physically separating in PA, consider the legal ramifications. Here’s the answers to the top 4 questions our firm gets, to help you make an informed decision.
Living together after you’ve decided to divorce or separate is extremely difficult, regardless of how you got there. It’s no wonder this tense, uncomfortable living situation often pushes divorcing couples to make rash decisions about moving out before fully considering the consequences.
Before you pack up your bags, it’s critical to consider the legal ramifications to moving out during divorce in Pennsylvania. There are lots of misconceptions, so we’ve gathered the top four questions we hear all the time.
Let’s clear things up so you can make an informed decision before taking action.
1. If I move out, will I still have a claim to the house in a divorce?
If you move out temporarily, you still have a claim on the house because it was your primary residency. If you bought the house, you also have a claim. However, this can change if you are separated for a prolonged period of time. If you establish yourself in a new residency for more than two years, the court could grant the current occupant of the house a greater portion of the marital property’s worth.
Even if you move out, you still have a claim on the marital home. The length of legal separation could be a factor in how much of its worth is granted to you.
2. Who pays the bills while we’re separated?
If you do choose to move out, you may be required to pay spousal support depending on who has a higher net income. However, before coming to an agreement on a divorce, you will still be required to pay off your portion of a mortgage loan or rent. This keeps you financially married to your spouse even though you may be emotionally separated. That’s why it’s best to collaborate before moving out. Determine a plan for you both that is financially fair. If you choose to mediate a divorce, you can create a temporary agreement about finances. If you are unsure about whether the separation will lead to divorce, you can have a separation agreement that outlines financial responsibilities.
Even if physically separated, you are still required to pay off your portion of a loan or rent before the divorce is final.
3. Will it be considered abandonment if I move out?
The court will only consider the issue of abandonment if your spouse makes a claim for it, though it typically does not gain much traction unless the separation is extremely prolonged and communication almost nonexistent. If this becomes an issue, it can affect the physical custody rights you have toward your children in a divorce. This is why discussing moving out with your spouse before you make the move is important. You can make sure abandonment will not be an issue before you go to court.
Abandonment is only considered by the court if your spouse makes a claim for it, and usually is only a factor if separation is very long and communication is almost nonexistent. Abandonment is a rarely used fault ground for divorce. Simply moving from the marital residence is not abandonment (the court does not expect the parties to live together until the divorce is granted).
4. Is there anything I should do while separated to help my divorce?
If you are going through litigation, a contested divorce can last many months if not years. This is one reason you might want to consider mediation if moving out is an issue. Mediation can be as fast as six months and may eliminate the need for you to make a total move out. Keeping the status quo will also minimize the legal complications around your divorce. If you still choose to move, look for a place where your children can stay as well. You want to keep communication during a separation so you stay a primary parent – not the parent they visit.