END OF YEAR TAX PLANNING CONSIDERATION FOR DIVORCING COUPLES

As the end of the year approaches, many of us will be inundated with television, newspaper and magazine reports regarding endof- the-year tax planning measures one can take to reduce your tax obligation. For those individuals who are in the midst of divorce proceedings, planning to be divorced before the end of the year, or are already divorced, there are often tax implications which need to be considered.
For those individuals who are planning to be divorced before the end of this calendar year, you should know that your filing status for 2016 will change as a result. It does not matter whether you get your divorce completed on January 1, 2016 or December 31, 2016, or any date in between, for the tax year 2016 you are considered to have been divorced for the entire year. If this applies to you it will generally limit your filing status for 2016 to either single or head of household (if you otherwise qualify). Your filing status can have serious financial implications.
The funds a divorcing or divorced spouse receives or pays may be includable as income or deductible as support. But not all funds paid or received qualify. You are permitted to deduct alimony paid to a spouse or former spouse if it is paid under the terms of a divorce judgment or Court Order or separation Agreement, and this is true regardless of whether or not you itemize deductions on your U.S. tax return. It must also be noted that: (1) voluntary payments made which are not set forth in a divorce judgment or separation Agreement are not deductible; (2) payments which exceed the amount stated in a judgment or Agreement are not deductible; (3) the alimony received by a spouse or ex-spouse is income in the year they receive it, and; (4) payments designated as child support are never deductible to the parent who pays the support or taxable income to the parent who receives it.
Agreements which distribute marital property at the conclusion of a divorce generally do not have income tax consequences. But sometimes there are exceptions and the specific language contained in these Agreements should provide guidance in such circumstances. Some examples are when pension or other retirement accounts are divided or when a decision needs to be made regarding who will claim property tax payments and the mortgage interest deduction on future separate tax returns.
Lastly, the issue of which parent can claim a child as a dependent on a tax return should always be set forth in a divorce Settlement Agreement. In most instances, it is the custodial parent’s right to claim the child as a dependent. The custodial parent is the person with whom the child actually lived for the greater number of nights during the year. However, the right to claim the child or children can be allocated differently in a Settlement Agreement when both parents agree. Parents are even permitted to alternate the dependency exemption or divide the number of children each will claim.
Lindabury’s Family Law Group has decades of experience representing clients in divorce and other serious New Jersey family law matters. We provide the full range of divorce and family law services and are easily accessible from our Westfield New Jersey office. Call today to schedule a consultation with James McGlew at (908) 233-6800.