Hans Kasper, MS-CPA, PS

Divorce and Community Property
 

Not every tax and non-tax issue regarding divorce is intended to be covered on this page.  Please obtain the advice of a really good divorce attorney.  I have seen some miserable divorce agreements that do not cover all of the necessary issues which results in arguing to continue after the divorce is finalized.

This is really important if you live in the States of Arizona, California, Idaho, Louisiana, New Mexico,  Nevada, Texas, Washington, or Wisconsin that you fully understand the implications of community property laws in the area of divorce.

Mostly, if you are still married and are going to file your tax return as "married filing separate" status, then you will report 1/2 of your income on your return and 1/2 of your spouse's income on YOUR return; and the tax deductions are split 50-50.

You are not responsible for reporting an tem of community income if ALL of the following conditions exist.

• You file a separate return for the year,

• You do not include an item of community income in gross income on your separate return,

• You establish that you did not know of, and had no reason to know of, that community income, AND

• Under all facts and circumstances, it would not be fair to include the item of community income in your gross income.

Here is the rule: if you are undergoing a divorce and it is not finalized by April 15th, then file the first extension (April 15th on Form 4868) and second extension (August 15th--good until October 15th--on Form 2868--make sure that you file the return before October 15th) until the divorce is final so that the filing of the tax return can be finalized during the divorce.

If you are married for the entire year, then additional special rules apply--see page three of the IRS publication linked in the blue bar above.

Carefully read the above IRS publication when going through a divorce.

Other areas to consider when creating a separation or divorce agreement.

• Who has custody of the children after the divorce determines who can file head of household status.

• If your spouse did not live with you during the last six months of the year and you have custody of the children, then you can file head of household status before the divorce in final.

• Who gets the dependency deduction for the children and in what years.

• How to allocate and transfer retirement funds so that you will not be taxed on the transfer.

• Whether or not the children or ex-spouse will be placed as beneficiaries on the retirement plan and when they can be so removed.

• Obtaining, prior to divorce, copies of prior tax returns and purchase documents of assets that will be transferred into your name.

• Alimony or maintenance monies received will be taxed and monies paid will be given a tax deduction.  In some cases, this could mean the payment by one spouse of the mortgage and utility payments, and etc on behalf of the other spouse.

• The payment of child support.

• The payment of college education for the children and spouse.

• The payment of medical insurance for the children and spouse.

• The continuation or creation of life insurance with the children or ex-spouse as the beneficiaries.

• The use of carryover tax credits (adoption credit and etc.) and net operating losses from a business.

• Here is the rule: if you are undergoing a divorce and it is not finalized by April 15th, then file the first extension (April 15th on Form 4868) and second extension (August 15th--good until October 15th--on Form 2868--make sure that you file the return before October 15th) until the divorce is final so that the filing of the tax return can be finalized during the divorce.

• If a joint return is filed, determination of who and how any tax due is going to be paid for this year and the prior years.  Please remember that a divorce contract is a private party contract that the IRS is not a party to.  Therefore, since you filed joint returns in prior years, unless you can prove innocent spouse status, then the IRS can still come after you for past due taxes even though the divorce decree says the other spouse is liable for the payments.

• If a joint return is filed, determination of who and how any refund is going to be divided for this year and the prior years.  Yes! if the other spouse receives the check they can tear it up, forge your name and take the money, or just let it sit.  How this is going to be handled must be determined before the divorce is final.

• The allocation of estimated tax payments for the year of the divorce and for the prior year if married separate returns are to be filed.  This agreement should be attached to the tax return.

• Have your trust or will revised.  Your original trust should have a statement allowing the change of the trust in case of divorce.  If it does not, then any changes must be agreed in the divorce agreement.

• Change the names on all jointly owned bank accounts, brokerage statements, and real estate.  On real estate, even though you have given up your interest in the property in the divorce contract, you will continue to be liable for the mortgage until the your name is removed from the mortgage loan.  Talk to your attorney about this.

• Regarding credit cards, you will continue to be liable for the debt until the your name is removed from the credit cards.  Talk to your attorney about this.

• When you are going to sell your home--before or after the divorce--can determine if you are going to pay tax on the home sale or not since the tax free gain exemption is $250,000 for a single person and $500,000 for a married person.

• Who and how the child care for a working spouse is going to be paid for the best tax advantage.

Click the links below to learn more about divorce agreements and income taxes.

• Divorce agreement language

• Estimated tax payments when filing separately