One way to avoid responsibility for the spouse's tax
liability is to choose the married filing separately status.
However, tax rates are higher, several potential credits will be lost, and
if one spouse itemizes, both must.
Couples who have children and don't live together in
the last 6 months of the tax year have another option. The spouse
who pays the majority of household costs for a home that is also the
child's home for more than half the year can file as "head of
HOH offers several additional credits over
married filing separately and it lowers certain marginal tax rates.
The HOH filer can take the standard deduction, which is higher than for
married filing separately, even if the other spouse itemizes. The
custodian parent is always entitled to the dependency exemption for
each child unless that parent specifically waives the right.
Child Support And Alimony
Divorcing couples who wish to reduce their tax
liabilities should consider reclassifying child support payments as
alimony. Child support is excluded from the recipient's taxable
income, and the payer cannot deduct it. Conversely, alimony is
included in the recipient's taxable income and the payer can deduct it.
If the alimony or support payer is in a higher tax
bracket than the recipient, the money paid as child support will mean more
taxes due than if paid as alimony. The payer may actually be able to
make larger alimony payments and save both parties money. Special
rules apply in determining the alimony deduction.
Since the basis of property transferred in a divorce
proceeding carries over from one spouse to the other, it's important to
consider not only the value of property received but also its tax
basis. The recipient of appreciated property must pay tax on its
inherent appreciation when its later sold. The presence of this
future liability should be recognized, quantified and properly reflected
in the divorce settlement.
Retirement funds, such as IRAs, 401(k) plans and
Keoghs are subject to division of property during divorce. However,
withdrawing the funds early can bring penalties unless a Qualified
Domestic Relations Order (QDRO) is obtained.
The QDRO directs a
plan's administrator to pay a specific amount to a child or former
spouse. This amount can be rolled over into a new IRA and is exempt
from the early withdrawal penalty even if disbursed directly to the