The IRS has extended the deadline for filing your returns to July because of the coronavirus pandemic and it also gives men and fathers in New Jersey who are considering or starting the divorce process an extra three months to plan for the tax consequences of your marital breakup.
We are not tax lawyers or accountants and refer clients to them when there is a complex divorce with significant household income or complicated assets. But over the years we’ve been divorce attorneys for men and fathers in New Jersey we’ve learned more than a few things that need to be considered.
This blog is not intended to give tax advice but if you are planning a divorce it is vital to keep these seven points in mind even if you don’t have any significant assets other than your marital home and a retirement account.
1 – Decide if it makes sense to file joint or separate returns. If you are legally married on December 31, the IRS allows you to file as a head of household, filing a joint return or to declare yourself to be married but filing separately. In many instances, this makes a lot of financial sense to file a joint return even if you and your ex are barely speaking to each other.
This comes into play especially if the couple will be selling the marital home as part of the divorce settlement. At a bare minimum, filing jointly can put extra money in your pocket as well as that of your spouse. The court takes this into account when determining spousal support.
2 – Negotiating the dependency deduction can be financially significant. The IRS assumes that the custodial parent will claim the dependency exemptions. child qualifies as a dependent if the parents are divorced, if there is a written separation agreement pending the final negotiation and divorce decree, or if the couple lives apart for the last six months of the year.
But there are a few exceptions to this rule. We have negotiated agreements where the custodial parent signs a written declaration that they won’t claim the children as dependents and the non-custodial parent attaches the written declaration to his tax return.
When we include this provision in the settlement, at the same time as we have the mother, if she will be the custodial parent, sign the declaration and we her sign a Form 8332 as a matter of prudence. It helps avoid possible tax issues later.
An important note: If the Covid-related lockdown has changed your income has been reduced or eliminated, we recommend requesting the court to lower any spousal or child support payments you are making. We wrote a blog about this recently because you cannot simply stop paying or send a smaller check.
3 – Selling the marital home. It is not uncommon for a couple’s marital home to be sold as part of the divorce. The IRS allows any capital gains to be excluded from your tax liability. If planned correctly with us and with your tax advisor, it may create a significant opportunity for you to maximize your portion of the proceeds of the sale.
4 – Relief from joint liability. In many marriages, one person may not really know how their finances work. Traditionally, this has been the wife but it is increasingly common for the husband not to completely know about his wife’s business or executive career and the compensation she receives. By claiming to be an “innocent spouse,” the IRS may relieve you of your obligation for the tax liability incurred by your ex-wife.
5 – Ensure that spousal support is taxable to the ex-wife. For alimony to be deductible to the man or father in New Jersey, it has to meet a number of specific conditions. First and foremost, the couple cannot file a joint return in the year when the spousal support is paid so a tax advisor will look at your specific situation and recommend the best course of action for you.
Also, the settlement must specify that the payment ends upon the death of the person who is paying it if that occurs before the time when the agreement specifies spousal support terminates. Nobody likes to think about their death but with several hundred thousand people projected to die during the pandemic, we are telling our clients to think about the unthinkable.
Whether our client is paying or receiving spousal support, we urge them to calculate the after-tax cash flow so they understand the full implications.
6 – Notice how retirement accounts are divided. A QDRO is a form the judge sends to the administrator of your retirement plan directing how the distribution will be handled at retirement. When the money is distributed, your ex-wife will be liable for that taxes and we ensure that this is specified in the settlement.
7 – Be cautious about deducting legal fees. The normal fees a client incurs as part of his divorce are not deductible. However, tax advice may be written off on your filing next April. We will provide you with a detailed billing invoice that shows how much we charged for working with you on tax issues.
Legal and Tax Advice Work Together
For many men and fathers in New Jersey, a first step in planning for the possible tax consequences of their divorce is to consider divorce consulting. It gives men and fathers an overview of the process plus outlining the documents and information you’ll need when you proceed, a strategy to protect your financial and business interests, helping you decide what you want regarding custody, and what to expect if you end up in court.
If you have questions about the role of taxes in your divorce, feel free to call me or any of our experienced family law attorneys for men and fathers in New Jersey. Reach us at either 973.562.0100 in Nutley or, in Montclair, at 862.245.4620.