While taxes are probably the last thing on your mind during a divorce, failing to plan for them can cost you thousands of dollars. If you’re in Utah, take a few minutes to review the following overview of how your taxes are affected by divorce, and then call us to learn more about how the divorce laws apply to your specific situation.
What Is My Filing Status During a Divorce?
Even if you are separated, you must still file as married if your divorce hasn’t been legally finalized by the end of the tax year. The only exception is if you were physically living apart before July 1st and had a dependent living with you. In that case, you can file as head of household. In all other circumstances, it is your choice as to whether you file as married filing separately or jointly. Just like when you were married, it’s a good idea to have your accountant review the numbers to see which option would minimize your taxes or maximize your tax refund. If you wish to file jointly, you must get your spouse to agree to it, and while you can’t force them to file jointly, you can negotiate for other consideration if they feel that filing separately is in their best interests. Note that you should never file jointly if you have concerns regarding your spouse’s ethics when it comes to taxes because you will be jointly responsible for their misrepresentations or underpayments.
Can I Take a Tax Deduction On Alimony Payments?
When payments are made to directly to a spouse, for example, spousal support or alimony, the spouse receiving the alimony must report the payments as taxable income. Because they are paying taxes on the money, the spouse making the payments can deduct them in full on their own taxes.
The spouses can negotiate that spousal support payments are non-taxable so that the receiving spouse does not pay taxes and the paying spouse does not receive a deduction. This can be done either as a goodwill gesture or in return for other financial considerations. This arrangement may be a wise financial decision when
- the payer cannot use the deduction — for example, when the payer’s income is too low to take it or if the income comes from non-taxable sources
- the payer has sufficient deductions already
- the recipient is in a higher tax bracket than the payer
- the recipient sells property to the payer after the divorce and does not want the proceeds to be considered income.
Is Child Support Tax Deductible?
Child support is paid on behalf of the child and not to the spouse receiving it, so it is not considered part of their income. Therefore, the receiving spouse is not taxed on it, and the paying spouse is still responsible for the taxes. That is, the paying spouse pays their regular income taxes and pays child support with post-tax dollars.
Attempting to report child support payments as taxable alimony to receive a tax deduction is a serious offense that could lead to back taxes, fines, interest, and possible prosecution.
Who Gets to Claim the Kids On Their Taxes?
The default rule is that the custodial parent claims the dependency exemption for each child. These exemptions are automatically tracked by computer, and the IRS will reject the tax returns of both parents and impose penalties on the parent who should not have taken the exemption. In case of joint custody arrangements, the IRS income tax rules say that the parent having custody for the greater portion of the calendar year receives the deduction.
The Utah court is free to order that the non-custodial parent be allowed to claim the child for tax purposes either on agreement of the parents or in the interests of justice. Often, the judge will allow the non-custodial parent to claim the child for tax purposes only if that parent is current on his or her child support payments. If the court decides to allow the non-custodial parent to receive the exemption, it will order the custodial parent to sign IRS Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents and provide it to the noncustodial parent who attaches it to his or her return.
Can You Deduct Utah Divorce Attorney Fees On Your Taxes in Utah?
Attorney fees are generally not tax deductible in Utah. The only exception is when they are spent to produce taxable income. This could include taxable alimony payments, deferred-tax retirement accounts, royalties, residuals, or any other form of taxable income. To receive the deduction, you would need to itemize your deductions and be able to prove that the attorney helped you receive, increase, or collect such payments. The deduction is only available if the attorney fees exceeded two percent of your adjust gross income.
Please remember that the advice above is general information and may not apply to your specific information. To minimize your tax exposure and avoid costly mistakes, consult with an experienced Utah tax professional before your divorce is final.
