In this blog, we frequently discuss tax matters and potential problems that impact small business owners and non-owners alike. In many cases, tax disputes result from adverse situations that impact an individual's professional or personal life. Divorce is one of the most difficult personal challenges an individual may face during his or her life, and the financial implications of a divorce can reverberate for years.
For individuals who are going through a divorce, or who are recently divorced, the emotional and financial challenges that accompany the process are likely very apparent. In the midst of dealing with one's own personal heartache and new financial standing, taxes are likely not top-of-mind. It's important, however, to understand how divorce and matters related to a divorce settlement may impact one's tax liabilities.
For example, prior to a divorce, a married couple with two minor-aged children likely filed jointly, and they were able to claim both children as dependents. However, when spouses divorce, only the custodial parent is allowed to claim a child as a dependent. A non-custodial parent who attempts to claim a child as a dependent could face fines and other IRS penalties.
Alimony or spousal support is another divorce-related matter that may impact a divorcee's taxes. In cases where an individual is receiving alimony from an ex-spouse, he or she must claim any monies received as income. For the paying ex-spouse, he or she is able to deduct alimony payments, which in turn reduce one's gross income and overall tax liability.
Despite the IRS’ rules and tax laws with regard to alimony, a report last May by the Treasury Inspector General for Tax Administration revealed that during 2010 alone, there was a $2.3 billion gap between the amount of alimony deducted and the amount claimed as income. In response to the TIGTA report, the IRS announced the agency has "enhanced its examination filters" to better identify non-compliant taxpayers and will issue fines and penalties accordingly.
Tax changes related to alimony and child dependents are just two of the significant changes that a divorcing or recently divorced individual must understand. Failure to do so can result in an individual incurring hefty IRS fines and penalties or worse.
Post Update: On April 16, 2015, Robert Fedor, of Robert J. Fedor Esq, LLC, appeared as a guest speaker at the Cleveland Metropolitan Bar Association Family Law Section monthly meeting. The discussion on April 16th, was titled: IRS Offers of Compromise Regarding Tax Liability: What Options Are Available for Divorcing Couples Who Owe Substantial Debt.
If you would like to discuss tax implications and changes regarding a divorce with an IRS tax attorney, please click here:
Source: IRS.gov, "Publication 504 (2013), Divorced or Separated Individuals," 2015
