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Filing Status
If a husband and wife obtain
a final decree (order) of divorce on or before 12/31, then
they are considered as being unmarried for that entire
year. The result is that they must file as Single or Head
of Household. Of course, if they were still married after
12/31, then they could file as Married Filing Jointly or
Married Filing Separately. However, there is one exception
to this latter rule, which allows a married person to file
Head of Household if the other spouse did not live in the
home for the last 6 months of the year and the spouse
claiming Head of Household status paid more then half of the
cost of maintaining the home as the principal resident for
the child or children. The other spouse must file as
Married Filing Separately.
Exemptions & Credits
The impact of a party’s
filing status also affects other tax issues. The custodial
parent is not only able to file as Head of Household, but
also may be eligible for the Earned Income Credit. The
custodial parent is also entitled to the dependency
exemption. There is a link between the dependency exemption
and the Child Tax Credit. The Child Tax Credit can only be
received by the person who claims the dependency exemption.
Therefore, the dependency exemption and the tax credit
cannot be split between the parties.
Spousal Support (Alimony)
Spousal support is treated as
taxable income to the spouse receiving the support and
deductible to the spouse paying the support.
Property Transfers
Transfers of property,
including the marital residence, from one spouse to the
other spouse are generally non-taxable events. These
spousal transfers incident to a divorce are treated like
gifts. The spouse who receives the property receives an
adjusted basis in order to compute gain or loss on the
future transfer of the property. It is also important to
know that pursuant to the Tax Reform Act of 1997, there is a
$250,000 exclusion of capital gain per spouse ($500,000 per
couple) on a principal residence sold after May 6, 1997
provided that the spouse or couple resided at the residence
for 2 out of the last 5 years.
Tax Liability Issues
Spouses have individual, not
joint, interest in tax refunds. Unless otherwise agreed, the
overpayment is allocated between the couple according to the
amount of tax paid by each spouse.
The
"Innocent spouse"
rules allow a spouse to apply to the IRS to disengage from
filed joint tax returns and to obtain protection from joint
liability, if he or she suspects that the other spouse has
not been honest in filing the joint tax returns.
The rule provides that where
the parties have filed a joint return, and where as a result
of the gross misstatements of one spouse, there is an
understatement of tax due, and where the innocent spouse can
demonstrate that he or she signed the tax return not knowing
about the understatement, then the innocent spouse will not
be responsible because it would be inequitable to hold the
innocent spouse liable for the deficiency taking all the
circumstances into consideration. There are time
limitations for filing with the IRS for innocent spouse
protection.
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