1. © 2006 Thomson Delmar Learning. All Right Reserved. CHAPTER 11 DIVORCE & TAX: NO SHELTER FOR THE WEARY

2. © 2006 Thomson Delmar Learning. All Right Reserved. Tax Ramifications of Divorce and Separation What the IRS does Susan Learns a Tax Tip Tax ramifications of alimony v. child support How to Research a Tax Tip Internal Revenue Code – Section 71(b) Divorce & Tax: No Shelter for the Weary Chapter 11

3. © 2006 Thomson Delmar Learning. All Right Reserved. The Six IRS Must Haves Payment must be in cash Cash must be paid directly to the payee Payments are allowable as a deduction if permitted under a written and signed agreement Payments considered – Tax deductible if not living to together – Non-Tax deductible if living together Differentiate between support payments and property settlement Payments cannot be disguised as child support Divorce & Tax: No Shelter for the Weary Chapter 11

4. © 2006 Thomson Delmar Learning. All Right Reserved. Attempting to Disguise Child Support Child support is not tax deductible Alimony and spousal support is tax deductible Reduction in alimony The Recapture Rule Tax Consequences of Transferring Property Transferring property – How capital gains tax works Divorce & Tax: No Shelter for the Weary Chapter 11

5. © 2006 Thomson Delmar Learning. All Right Reserved. Transferring Property to a Third Party Beneficiary spouse The IRS’s three requirements: – Transfer is made pursuant to a divorce or separation agreement – Transfer is made pursuant to a written request of the beneficiary spouse – Transferring spouse receives a written acceptance of the property transfer after the property has been transferred Divorce & Tax: No Shelter for the Weary Chapter 11

6. © 2006 Thomson Delmar Learning. All Right Reserved. Retirement Plans and Property Settlements Some types of retirement plans – Pensions – Individual retirement plans – Profit sharing – Keogh plans – 401K plans – 403B plans Understanding Qualified Domestic Relations Orders Purpose of a QDRO Divorce & Tax: No Shelter for the Weary Chapter 11

7. © 2006 Thomson Delmar Learning. All Right Reserved. Steps to Take When Seeking Retirement Benefits for an Alternate Payee Get the plan’s instructions before having the Judge sign the order Preparing a Qualified Domestic Relations Order Review the example (Exhibit 13:1) Divorce & Tax: No Shelter for the Weary Chapter 11

8. © 2006 Thomson Delmar Learning. All Right Reserved. Which Spouse is taking the Dependency Exemptions? Dependent exemption Who is entitled to receive the benefit? What needs to be signed if the other parent is permitted to take the deduction? – IRS Form 8332 Are Legal Fees Tax Deductible? Legal fees in connection with a divorce or separation are not deductible Tax advice is tax deductible Divorce & Tax: No Shelter for the Weary Chapter 11

9. © 2006 Thomson Delmar Learning. All Right Reserved. Who’s Head of the Household Now? Head of Household – Person who pays for over half of the costs for maintaining a household without children – Three step test if children are involved: ◦ Claiming spouse must provide over half the costs of maintaining the household ◦ The house must have been the children’s main residence during the tax year ◦ The former spouse could not have lived in the household during the last six months of the tax year Divorce & Tax: No Shelter for the Weary Chapter 11

10. © 2006 Thomson Delmar Learning. All Right Reserved. Tax Ramifications of Selling the Marital Home Capital gains taxes One Option is Filing Separately Married, filing separately – Higher tax bracket Review Tax Clauses (Exhibit 13:2) Does Declaring Bankruptcy End a Support Obligation? Divorce & Tax: No Shelter for the Weary Chapter 11

11. © 2006 Thomson Delmar Learning. All Right Reserved. Ethics Alert: Do e-mails automatically convey client status? Divorce & Tax: No Shelter for the Weary Chapter 11