IRS Forms and Information Resources

Jeanne M. Hannah is a family law attorney in Traverse City, Michigan who has written an excellent family law blog for a number of years. She recently gathered links to a number of IRS tax resources and publications and published them in her blog. The following is the text of her post of March 14, 2011:

The IRS has released updated publications and forms that help divorced and divorcing people understand and deal with these issues:

• income tax filing status
• the right to claim tax exemptions
• how to protect against tax liabilities arising from FOC intercepts of tax refunds on joint returns when, in fact the intercept is for child support arrearages of only one spouse and some of the tax refund belongs to the other spouse.
• how to claim "innocent spouse" relief from liability caused by unreported income by the other spouse are now available.

See, in particular, IRS Publication 504 Divorced or Separated Individuals [January 10, 2011]

Other recently published and/or updated publications or IRS Forms that family lawyers' clients will find helpful and informative are:

Injured Spouse Relief: IRS Form 8379 is filed by one spouse (the injured spouse) on a jointly filed tax return when the joint overpayment expected was applied (offset) to a past-due obligation of the other spouse (e.g., a tax intercept for unpaid child support arrearages. This is how the injured spouse recovers her tax refund. See also the instructions for using Form 8379 here.

IRS Publication 971. How to Claim Innocent Spouse Relief. [Revised February 2011]

Innocent Spouse Relief: IRS Form 8857 is used to request exemption from tax liabilities cause by the under-reporting of income by the other spouse on a joint return filed during the marriage. See also Instructions for Filing Form 8857

Other recently revised publications of interest to those recently divorced or divorcing are these:

Publication 501: Exemptions, Standard Deduction, and Filing Information [Published January 5, 2011]

Publication 544: Sales and Other Dispositions of Property, including transfers to spouse, rollovers or retirements accounts

Publication 555: Community Property, including information about how to handle income from separate property [Revised December 2010]

Publication 590: Individual Retirement Arrangements (IRAs) [Published February 3, 2011]

This should be useful information for anyone going through a divorce, considering starting a divorce, staring at an impending divorce or recovering from a divorce. For other interesting and helpful information, you can check periodically on Ms. Hannah's blog, Updates in Michigan Family Law. I highly recommend her work.

Who Gets the Tax Exemption for the Kids?

Sometimes, one of the biggest points of contention in a divorce is something the state court has no real power to decide. That's the right to claim the federal income tax exemption for the children. The basic rule is that whichever parent has primary custody of the children gets to claim use the tax exemption. When the parents are designated as Joint Managing Conservators, they sometimes want to argue over the right to claim the exemption.

The Dallas Divorce Law Blog by the May Firm had an excellent, brief post that discussed the issue that came up in a recent Dallas Court of Appeals case. The Court again made clear the following points: (1) state courts have no authority to rule on federal tax matters, (2) the parent with primary custody gets the exemption, and (3) primary custody may be determined by figuring out which parent has more time with the children.

Figuring out who has the kids more can be pretty tricky sometimes, depending on what the possession schedule is. Now, there are a lot of different kinds of schedules. If both parents have the kids for alternate weeks, they could have very nearly equal time. The only difference might come in the holidays. Other schedules appear to have equal time sharing and present a similar problem.

What can be done? (1) You can go through the schedule and count the days or hours to determine the "winner". (2) You could agree to alternate years with the exemption. (3) If there are several kids, you can split the exemptions between the parents. (4) If there is a disparity of income, you could get someone to calculate the actual impact of the use of the exemptions for both parties and then make a rational agreement to maximize the benefit. (5) One parent could pay a sum to the other parent for the right to take the exemption. (6) You could both claim the exemptions and then sort it out with the IRS when they catch it -- THAT's the worst idea. Don't let it go that far. It's not worth it!

There are undoubtedly other solutions. The key to remember is to reach an agreement. Use your best judgment and reach some compromise agreement. It will save everyone money in the long run.

It's Tax Time!

Once the calendar flips over to January, people inevitably start thinking about filing their income taxes. Some look forward to getting a nice refund. Others start worrying about how they will pay whatever taxes they owe. Still others don't have any idea where they stand. When couples go through divorce, their tax lives often become much more complex. I'm not going to try to give tax advice here, but there are some things for you to look for and think about as you start planning your taxes.

Let me start with my conclusion: You need to see a CPA to make sure the taxes are done correctly and that you don't end up paying more than your share. Here are some of the issues to consider:

1. Especially this year, in the midst of the economic crisis, there are many changes in the tax laws. It takes a professional to keep up with the changes.Tax breaks come and go. It would take a lot of time and study for an amateur to correctly know all the changes.

2. While it is tempting to just rely on tax software and do your own taxes, especially if you have done it in the past, you may not be up to the task this year. If you are in the middle of a divorce, there are many decisions that have to be made on the taxes and it would pay you to get help. President Obama's new Treasury Secretary, who was a high official with the Federal Reserve Bank in New York, used a software program, made a major mistake with his return and almost didn't get confirmed as Secretary. He could have avoided that problem if he had used a competent professional.

3. Make sure you and your spouse both don't claim the same deductions, exemptions and credits. That frequently happens during divorces. That requires communication and a professional to help find the best course of action.

4. Be careful if any of the following happened, or you think may have happened, in the last year:

• a house was sold,
• debt was forgiven,
• someone was unemployed,
• funds were withdrawn from a retirement plan, or
• a family business went under.

You should have a CPA help you analyze the situation. There are many other potential traps in the tax laws.

5. If you are separated, but not divorced, you should figure out whether it is to your advantage to file a joint or separate return. A CPA is best able to look at all the factors and recommend a course of action.

Hopefully, these comments will persuade you to seek guidance from a CPA for the tax issues you run into when you file a tax return during a divorce.

Time for Tax Planning

A Gentle Reminder: As of today, there is barely enough time to finish a divorce here in Texas before the end of the year. Because of the 60-day waiting period required by Texas law, a divorce filed after October 31 cannot be finished by the end of the year. If you are in a divorce that is already pending, you can determine whether the 60-day waiting period will be a problem.

Some people want to wrap up their divorces at the end of the year, or just after the first of the new year. If there may be tax considerations in your case, you should talk with your CPA or a tax attorney to advise you about your best course of action.

Naturally, given that it takes two to tango (and file tax returns), this is not necessarily a decision that just one party to a divorce gets to make. Timing for tax purposes affects both parties, so there must be a meeting of the minds or a court ruling. Taxes sometimes can be a major issue in a divorce, so be prepared to address the issue. You need to think about your situation and, with professional help, decide how you want to proceed. If you are going to mediation, be prepared to discuss the tax aspects of any settlement.

This may seem like just one more thing to deal with, but it can really affect the bottom line of any settlement, so plan ahead!

Just What the Doctor Ordered: Alimony

One word that evokes strong feelings of love and hate in the divorce world is "alimony". It’s obviously related to that other word with similar connections to love and hate: "money".

In Texas, alimony can be awarded while a divorce is pending or after it is final. Attitudes of judges, lawyers and the parties often make "temporary" alimony a very limited option, and post-divorce court-ordered alimony is very rare in Texas because of both the long-ingrained attitudes and a very restrictive statute that makes it difficult to qualify for alimony and permits only a small amount for a short duration. On the other hand, voluntary alimony paid by agreement can be very flexible and mainly needs to comply with IRS regulations.

In some divorces, clients refuse to consider alimony in voluntary settlements. That is a very short-sighted approach. It is often because of popular misconceptions that assume Texas alimony law is like alimony in other states where it can be almost automatic, substantial and long term.

Wiser and more creative parties discover that alimony can be an excellent tool that helps cases settle. It can enable both parties to meet their goals and needs, while providing tax relief for the paying ex-spouse. The parties need to make sure that it is not used to replace child support and that it is not tied to events or dates relating to children; the IRS really looks for disguised child support. Done properly, alimony can be a cost-effective means to help the other party get on his or her feet, start a new career or deal with other transitional issues resulting from the break-up of the family.

Alimony payments can promote good will within the family which may trigger a willingness to make concessions in other areas. While alimony may not be appropriate in every case, it certainly should be considered for the benefit of both parties in a high net worth divorce situation. In many long-term marriages, one spouse has not worked outside the home for years and that spouse will need some extra help. Providing that help in a thoughtful and creative manner can lead to a win-win situation for both parties, which is the best cure for a family in pain.

How to Protect Your Child Dependency Tax Deduction

Grant Griffiths, in his excellent Kansas Family Lawyer blog, brought up a timely subject that was also covered in detail in IRS web site .

The problem underlying the Tax Court case that was cited in the blogs was that the non-primary-custodial father had lost his copies of Form 8332 in a fire. There wouldn't have been a problem is he had kept extra copies in a safe deposit box or with family or friends. Another possible solution would be to get his ex-wife to sign another form. It's reasonable to assume that they probably weren't on the best of terms if he decided he would have more success by going to Tax Court. As it happened, he was wrong.

The message from all this is clear: Plan ahead. Keep important documents safe and make extra copies of them. It's a good idea to start working on taxes now so that you have time to get all the records you need.