Divorced Couples, Put Aside Your Differences...for the Tax Break
March 24 2017 - 05:59AM
Dow Jones News
By Laura Saunders
Divorce has many miseries. Taxes are one of the most
persistent.
Issues can resurface annually during filing season and continue
to affect couples years after they split. If former spouses don't
set aside their differences, one or both partners often end up
overpaying.
Scott Kaplowitch, a managing partner with Edelstein & Co. in
Boston, recently prepared a divorced couple's returns. Although the
ex-wife had the right to take deductions and credits for the
couple's children, there was no benefit for her because she has no
employment income. She allowed her former husband to use the tax
breaks and saved him about $2,500, Mr. Kaplowitch says.
The couple didn't split the savings, he adds, but "it produced
good will for the future."
That's the best case.
Tensions between ex-spouses are evident in Internal Revenue
Service data. For the five years that ended in 2015, people paying
alimony deducted some $57 billion, while people receiving alimony
claimed only about $47 billion -- a $10 billion discrepancy.
After a Treasury watchdog chided the IRS about the alimony gap
in 2014, the agency became more vigilant. Now returns are
automatically rejected if the alimony payer doesn't supply a Social
Security number for the recipient, an IRS spokesman says.
If you're divorced, here are tax issues to watch.
Alimony. These payments, often called "maintenance," are
deductible by the payer and taxable to the recipient. To be
deductible, payments must be made in cash and must be provided for
in the divorce or separation agreement.
Voluntary payments for other items, such as a new computer for a
child, typically can't be deducted. The IRS has a history of
challenging alimony deductions it thinks are nondeductible property
settlements, child support or gifts.
Alimony can fund an individual retirement account. Alimony
deductions end when the recipient dies, if payments haven't already
ended. For more on the definition of alimony, see IRS Publication
504.
Child support. These payments aren't deductible by the payer or
taxable to the recipient.
Dependent exemption. This benefit is a deduction, currently
$4,050 for each child who qualifies as a dependent. There are
several tests for this benefit, and they are detailed in IRS
Publication 501.
Ex-spouses can often use IRS Form 8332 to toggle this exemption
back and forth from year to year. This can be a good strategy if
one ex is sometimes a high earner, because in 2016 the exemption
began to phase out at $259,400 of adjusted gross income for single
filers.
For feuding ex-spouses, there is an important caveat: The parent
claiming the dependent exemption must include each child's Social
Security number, and the IRS's system will reject a later-filed
return claiming the same number. Even if the second-filing spouse
deserves to take the exemption, the IRS seldom has the resources to
sort out this issue, experts say.
Tax credits. These valuable breaks offset taxes instead of
merely reducing income, and in some cases they can result in a
refund check for a taxpayer who owes no tax. Tax credits involving
children typically go to the spouse claiming the personal
exemptions for them.
The Child Tax Credit of up to $1,000 per child began to phase
out at $75,000 for single filers in 2016. The Earned Income Credit,
which benefits the working poor, was up to $6,269 for single filers
with three or more children and income up to about $48,000. The
Dependent Care Credit, which is up to $2,100 for two or more
children and $6,000 of total eligible expenses, has no income
limit.
Education benefits. For most people, the best tax break for
college is the American Opportunity Credit, which can reduce taxes
by as much as $2,500 on up to $4,000 of college expenses per
child.
Single filers get a lesser break or none if their income exceeds
$80,000, but in some cases the child can benefit by claiming the
credit if neither parent can -- even if the child doesn't pay the
tuition.
Taxes on a residence. To take typical homeowner deductions for
mortgage interest or property taxes, a person must have full or
partial ownership of the home and actually pay the expenses.
What if a home is sold and the proceeds divided? Each ex-spouse
can get an exemption of up to $250,000 of gain, as long as that
person both owned the home for two years and used it as a main
residence for two years. For more details, see IRS Publication
523.
(END) Dow Jones Newswires
March 24, 2017 05:44 ET (09:44 GMT)
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