Tax Considerations in a Divorce

Tax on dollar currency

Filing one’s taxes during or immediately after a divorce can be especially challenging. Before your divorce is finalized, there are a few tax considerations that should be addressed.  Addressing these issues prior to finalizing your divorce will help ease the transition during tax season post-divorce, and may help you avoid any negative tax consequences or an IRS audit. The following points should be considered during the divorce proceeding, and are important to discuss with an attorney or your tax preparer to determine the tax consequences of your divorce agreements:

  • When can you file as single, married filing jointly, married filing separately, or head of household, and which options offer the best possible benefits? Once your divorce is finalized, you are considered unmarried for the entire year of your divorce, this includes if you get divorced on December 31st. If your divorce is not finalized by December 31st, you will have to file your taxes as married filing jointly or married filing separately. There are rare occasions when you can even file head of household even though you are married.  Determining your tax filing status, should be done with the assistance of an experienced tax preparer with the goal of maximizing the best financial result to you and your spouse.  This may require you to work cooperatively with your soon-to-be-ex to determine the best means to file your taxes and to take advantage of the benefits offered by doing so.
  • Which parent can claim the child or children for the dependency exemption and take the applicable tax credits offered to parents? Generally, the parent with primary placement of the child(ren) may claim the child(ren) on their tax return. However, parties can negotiate who can claim the exemption in divorce cases or the court can order the same. It is imperative to include in the Marital Settlement Agreement an award of how each party shall claim the child(ren) on their respective tax returns.
  • What do parents need to claim the child(ren) as a dependent? Parents must complete an IRS Form 8332 “Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent,” to allow the other parent to attach it to his or her tax return if they are claiming the child(ren) Form 8332 is the document that allows a parent to claim a child on his or her taxes even though he or she may not fit the requirements under IRS rules to do so.
  • Do I have to report child support as income? Child support payments are not deductible by the paying parent or taxable to the parent receiving the child support.
  • Can I deduct maintenance payments? Maintenance payments (or alimony) are generally tax deductible by the party making the payment, and must be claimed as income by the recipient. It may be helpful to include a reference to the federal tax code IRC 71 in your divorce decree can ensure that the parties are aware of their responsibilities regarding maintenance payments.
  • Do I have to pay taxes on assets awarded to me in my divorce? A property transfer between divorcing spouses does not create any additional tax liabilities, if it is ordered in the divorce decree.
  • Do I have to pay taxes on retirement assets awarded to me in my divorce? In order to avoid tax consequences when dividing a retirement account incident to a divorce, a Qualified Domestic Relations Order or QDRO, may need to be drafted after the date of divorce to instruct the retirement plan administrator to divide the benefits as ordered by the divorce decree. If the recipient spouse does not liquidate such funds and follows the IRS rules to invest such funds into a qualified plan, there are no tax consequences to such a transfer.
  • Will I be audited post-divorce? You risk being audited if you do one or both of the following: 1. both parents claim the same child on their taxes, 2. The amount of maintenance the recipient lists on line 11 of his or her 1040 does not match the number that the payor lists on line 31a. It is always good practice to speak to your ex-spouse before filing your taxes to make sure that you are claiming the correct child(ren) and that the amount of maintenance listed as received on your tax form matches the amount of maintenance paid.

There are several considerations in determining what options are best for you to maximize your tax benefits and to avoid any additional tax burdens after a divorce. Because each divorce is unique, it may be important to speak with an attorney or a tax professional to best address the tax consequences of your proposed divorce agreement before finalizing your divorce. If you are getting a divorce and have questions regarding the tax consequences of the issues outlined above, call us at (414) 258-1644 to schedule a free initial consultation to discuss your case.

Maintenance (Alimony) in Wisconsin

Wisconsin Maintenance (Alimony) FAQ’s

WHO IS ENTITLED TO MAINTENANCE AND HOW DOES THE COURT DECIDE THIS ISSUE?

Maintenance, or what used to be called alimony, is ordered by the Court based on certain factors in the Wisconsin Statutes. There is no definitive test or guidelines in Wisconsin for when and how much maintenance should be ordered. The decision to award maintenance to one party is a discretionary decision of the Court. In other words, the Court has a lot of leeway when deciding the issue of maintenance. The Court must consider a list of factors stated in the Wisconsin Statutes and any other factors that the Court deems relevant. Some of those factors are:

(A) The length of the marriage;

(B) The age and the physical and emotional health of the parties;

(C) The division of property;

(D) The educational level of each party at the time of marriage and time of divorce;

(E) The earning capacity of each party;

(F) The feasibility that the party seeking maintenance can become self-supporting at a standard of living reasonably comparable to that enjoyed during the marriage and the length of time necessary to achieve that goal;

(G) The tax consequences to each party;

(H) The contribution by one party to the education, training or increased earning power of the other;

(I) An agreements between the parties where one party has made financial contributions to the other with the idea that the other will reciprocate in the future; and

(J) An ability to pay by the party from whom the maintenance is being sought.

The attorneys at Nelson, Krueger & Millenbach, LLC will be able to evaluate the facts of your case and advise you as to the likely result of a maintenance request.

MY SPOUSE AND I HAVE ONLY BEEN MARRIED A SHORT TIME, WILL I GET MAINTENANCE?  HOW LONG DO I HAVE TO BE MARRIED TO GET MAINTENANCE?

Unless there is a large disparity between the income levels of the parties or the party requesting maintenance has health problems, a maintenance award in a short term marriage would be unusual. The longer the term of the marriage, the more likely a maintenance award is.  Once a marriage exceeds 20 years, maintenance is almost a certainty in a case where there is a disparity in income.

IS THERE A SPECIFIC GUIDELINE WHEN DETERMINING MAINTENANCE?

There are no specific guidelines in Wisconsin when determining maintenance. However, when there is a fairly long term marriage where one party has the ability to pay and there is a disparity in incomes between the parties, the court would generally award maintenance. In that situation, the goal of the Court is usually to either:

(A) Equalize the net disposable incomes of the parties, or

(B) Meet the budget of the payee spouse, assuming its reasonable, in an effort to maintain a standard of living equal to or similar to what he/she enjoyed during the marriage.

In these cases, the Court generally considers what are the needs of the party seeking maintenance based on her/his budget and what is the ability to pay of the other party. When analyzing support issues, taxes and other budgetary factors also must be considered.

HOW LONG DOES MAINTENANCE LAST?

The Court usually sets a definite term for maintenance except in certain cases such as an extremely long term marriage, if the parties are older or where the person requesting maintenance has an inability to work. If maintenance is ordered for a set period of time and the party receiving maintenance feels it should continue, he or she can file a motion requesting an extension. This must be done, however, before the term of maintenance expires.

CAN MAINTENANCE BE MODIFIED OR TERMINATED?

If a party dies or the receiving party remarries, maintenance would terminate. If the person receiving maintenance begins living in a marriage-like relationship, maintenance can be modified or terminated. However, unless the parties agree otherwise, maintenance is always modifiable based on a substantial change in the circumstances of either party. This change in circumstances could be a change in income, a change in earning ability or a change in living circumstances. When one party believes that there has been a substantial change of circumstances in either parties situation, that party may petition the Court to change the amount or duration of maintenance.

WHAT ARE THE TAX CONSEQUENCES OF MAINTENANCE?

The party receiving maintenance must declare the support received as income on his or her income tax return and that maintenance will be taxable to him or her. The party paying maintenance will be able to deduct those payments on his or her income tax returns. The tax factors of maintenance must be considered when originally determining the award of maintenance at the time of divorce or any modification of maintenance.

You can also usually deduct any attorneys fees paid directly attributable to you receiving maintenance. Discuss this further with your Certified Public Accountant or income tax preparer.

WHAT IF MY EX-SPOUSE RETIRES? WILL MY MAINTENANCE END?

The retirement of a paying spouse may justify modifying or terminating maintenance in certain circumstances. For example, if a paying spouse retires and has no other source of income except his or her retirement benefits, of which you received one-half at the time of divorce, maintenance most likely would be terminated. However, this would also depend on why the party retired, the age he or she retired, if he or she has other sources of income, the ability to pay maintenance after retirement and your ability to provide for yourself.

WHAT IF MY SPOUSE SEEKS MAINTENANCE FROM ME AND I DONT FEEL THAT MY SPOUSE IS EARNING TO HIS OR HER FULL POTENTIAL?

In cases when one spouse does not believe that the other spouse is maximizing his or her earning potential, the Court can impute an income to that party. This income could be a prior income that the party is no longer earning for whatever reason. Or, in some cases, a vocational evaluator can be hired to provide expert testimony to establish what the non- or under-earning spouse could make if working full-time and/or to maximum ability. The expert will review the education, work and earning history and consider market factors and statistical information related to incomes to determine an income for the under-earning spouse. The Court will then impute or assume that the under-earning spouse is earning that amount when deciding the issue of maintenance.

WHAT IF MY SPOUSE IS SELF-EMPLOYED OR EARNS CASH? HOW CAN INCOME BE DETERMINED TO CALCULATE MAINTENANCE?

In cases when one spouse is self-employed or receives cash payments for income, financial records and documents can be obtained or subpoenaed to determine income. Similar to the response in #8, the Court can impute an income to that party based on financial records and/or testimony of financial experts, such as a Certified Public Accountant, based on a review of financial documents, such as tax returns, bank statements, investment accounts, etc.

The Court will consider the testimony of financial experts and evidence in the form of financial documents when determining what income is available for support from all sources.