From time to time, I like to forward information from other professionals that may assist you when going through your divorce. See the name and professional information of the CPA who compiled this information.
Pay special attention to new rules regarding FAFSA.
Here are the tips!
1. If a taxpayer has no wages, but has taxable alimony income on their tax return, they can still fund and deduct an IRA contribution ($5,500, or $6,500 if 50+). A Roth IRA may even be a better option.
2. FAFSA rules are changing. Soon colleges will start using “prior-prior” year tax returns for financial aid consideration which makes filing a tax return by the first or middle of February less important (starting with the school year of fall 2017-spring 2018, a student can submit the FAFSA as early as October 2016 using the 2015 tax return). This may affect your negotiations for timing of dependent exemptions and education tax credits.
3. Noncustodial parents who are claiming dependent exemptions per the parties’ agreement MUST attach the form 8332 to their tax return to get the exemption. Ensure that your agreements include a clause that the custodial parent will execute this form. A custodial parent, who receives child support and releases the exemption, would likely prefer to sign this annually (as opposed to signing the form once with all the future years included).
4. While proper transfers between the spouses’ IRAs, pursuant to a divorce or separation agreement, are tax-free, there is income tax as well as a 10% penalty for any subsequent withdrawals. They can only avoid the penalty if they are 59 ½+ or have one of the few exceptions (paying your legal fees are not one of those exceptions). So use qualified plans, and a valid QDRO, to get monies out (still taxed but there is a one-time exception to the 10% penalty).
5. A taxpayer may still be eligible to file “head of household”, even if they give away the exemption for their qualifying child to the other parent.
6. Just because a divorce or separation agreement says that your client’s spouse is responsible for any and all income taxes on jointly filed tax returns, does not make it so (according to the IRS). It certainly helps to have this clause in your agreements (shows intent) when their accountant/tax attorney subsequently files for innocent spouse or other relief because of unreported income or unpaid taxes. However, it is an onerous process, and not always successful, to get your client off the joint tax bill.
7. Your client may move into the family rental, second home or vacation property as their new primary residence. If they sell it at a gain after the two year “own and use as primary residence” rule is achieved, he or she may allocate only a portion of their gain against the usual $250,000 exclusion (assuming they are single) from any capital gains. Since 1/1/09, owners that convert such property into a principal residence, and then later sell that property, will need to multiply their gain by a fraction to determine the taxable portion of their gain as well as the gain that is eligible for the exclusion. And, generally, the client has to pay taxes on any previously deducted depreciation.
8. Life insurance payments can be set up as deductible alimony if properly structured and the correct language is in the agreement.
9. Some legal fees are deductible by the payor as a 2% miscellaneous itemized deduction. The fees need to be for the production of taxable income, i.e. alimony. However, legal fees for the protection of taxable income are generally not deductible. Legal fees for battling over property can generally be added to the cost basis of that property.
10. The “child care credit” and the “child tax credit” are two different things. For the child tax credit (up to $1,000 for each child under 17, depending on income levels), the custodial parent usually takes this credit. However, the noncustodial parent may take it if the custodial parent releases the dependency exemption (Form 8332 noted above) to the noncustodial parent. For the child care credit (also known as the “dependent care credit” for children under 13, unless disabled), generally only the custodial parent can claim the child care credit, even if the custodial parent releases the dependent exemption for the child.
Catharine Fairley, CPA, PFS, CFP®, CDFATM
Catharine Fairley CPA, LLC
3 College Avenue, Suite 1
Frederick, MD 21701