Tax Issues on Separation And Divorce Part 1

March and April are the busiest times of the year for tax accountants. Many of the clients Thibault Jones Law works with have certain tax benefits when it comes to dealing with thier family issues. It is now tax season and a great time to discuss some of the potential tax issues relevant to family law clients.

CCH - a Wolters Kluwer business is a company that focuses on research in various areas of tax, accounting, law ect. This series will break down a great article produced by CCH entitled "Tax Issues on Separation And Divorce".  Due to the length of the article, this blog will break it down into smaller parts, however, you can read the entire article on the website of CG Jones CGA or click here and scroll down to the article.

If you know someone who is or has been through divorce or separation, please share this article with them. Too many people are not getting the full tax credit they deserve simply because of a lack of understanding.

Enjoy...

When a marriage ends, the number and variety of decisions to be made in what is already a time of emotional turmoil seem endless. The individuals involved are typically focused on making new living arrangements, settling on custody and access rights, and generally trying to fashion new lives for themselves and their children. At such a time, the need to make prudent tax and financial decisions often takes second place. 

However, the decisions and agreements made following the end of a marriage can affect the tax and financial well-being of both parties for years afterward. Adding to the confusion, the rules and administrative policies governing the taxation of separated and divorced spouses have undergone some significant changes in recent years. From a financial point of view, when a marriage ends, the parties involved are generally most concerned about support arrangements and about the division of assets acquired during the marriage. This article summarizes the tax rules and administrative policies currently in effect with respect to those issues.

When are support payments deductible? 

The law lays down very specific rules as to what constitutes support payments (technically called “support amounts”) and when they are deductible to the payer (and therefore taxable to the recipient). Prior to 1997, the terms “alimony” and “maintenance” were used in place of support amounts, but the definitions are virtually the same. Minor differences are discussed in context below.
The rules continue to distinguish cases where a marriage or common-law marriage has broken down from the cases in which there never was a conjugal relationship but there is a child on behalf of whom support is ordered. The rules are discussed under separate headings below.
Where marriage breakdown occurs, including the breakdown of a common-law relationship or a common-law partnership, a payment constitutes a support amount and is deductible if all the following criteria are met:
• the amount must be paid under an order of a competent tribunal or under a written agreement; however, please note that a court order or written agreement can validate earlier payments of the year and the preceding year;
• the amount must be payable or receivable as an allowance on a periodic basis (for 1996 and earlier years read “the payment must be in the nature of alimony or other allowance payable on a periodic basis”); however, please note that a subsequent court order or written agreement can validate as periodic specified expenses which may in fact be contingent or occasional;
• the amount must be for the maintenance of the recipient, the children of the recipient, or both;
• the taxpayer must be living apart from the recipient at the time of the payment because of the breakdown of their marriage;
• the recipient has discretion as to the use of the amount; in either form, the issue is whether payments made to a third party qualify as support amounts; in both cases, the answer is yes provided the governing order or agreement provides for such third-party payments for the benefit of the recipient or children in the recipient’s
care; and
• the amount is not a “child support payment” covered by new system rules effective May 1, 1997.

Please stay tuned for Part 2...