IRS Tax Deductions for Divorce Settlements
When spouses agree to a divorce settlement at the end of their marriage, the terms of the settlement will likely affect each party's tax filings. A settlement often establishes alimony, child support, division of assets, assignment of debt obligations and payment of legal fees. The IRS sets the federal tax rules that determine the deductions related to the terms of the divorce settlement.
Alimony
If a divorce settlement requires payment of alimony, also known as spousal support or maintenance, as permitted by the couple's state of residence, the IRS allows for a related deduction. The ex-spouse paying alimony can take alimony as a tax deduction, while the ex-spouse receiving alimony must claim the payments as income. The couple's divorce settlement or court-ordered decree must specifically require payment of alimony because the IRS doesn't allow the deduction of voluntary payments. The person claiming the deduction must use IRS Form 1040 and include the alimony recipient's Social Security number. The IRS doesn't permit use of Forms 1040A, 1040EZ or 1040NR if the individual plans to include deductible alimony on the tax return.
Dependents
Each ex-spouse might want to claim the couple's children as dependents in order to claim exemptions on a tax return. The couple's divorce settlement might identify the ex-spouse who has the right to claim each child as a dependent for tax purposes. If the divorce decree doesn't specify the spouse who can use the exemption for a child, each individual must look to the relevant IRS rules or consult with an attorney or accountant who has tax expertise working with divorced families. In general, the IRS only allows one parent to claim a child as a dependent; both parents can't use the same child as a qualifying child for tax purposes. The parent with custody is usually the party who can claim the child as a dependent. Under specific circumstances, however, the noncustodial parent can claim the dependent if he can meet the IRS criteria for financial support, custodial time and written agreement by the custodial parent.
Property Settlement
A property settlement establishes the division of assets and debts between spouses as part of their divorce. The IRS doesn't recognize gains and losses resulting from the transfer of property as specified by the final terms of the couple's divorce. To qualify as a transfer because of a divorce settlement, the spouses' agreement must specifically require the property transfer. In addition, the IRS requires completion of the transfer within six years of the date on which the marriage legally ended. The tax consequences of a property settlement can vary significantly from one couple to the next. Each spouse might need to consult a divorce attorney or accountant who can explain the tax requirements and potential deductions to be claimed by either party.
Divorce-Related Fees and Costs
The IRS doesn't permit either party to deduct divorce-related legal fees, filing fees or other court costs. In particular, the IRS rules don't include a deduction for attorney's fees for general representation in a divorce. However, the IRS does allow for deduction of fees incurred to get tax advice during divorce proceedings. The tax advice might relate to alimony, assessment of property during negotiation of the divorce or post-divorce tax consequences.
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