What About Taxes in Tennessee Divorce?

With so many decisions to make in any divorce, Tennessee couples often forget there will be tax reporting changes, too. Their decisions on custody and child support, alimony, and the division of marital property are all important matters with short-term and long-term consequences. And all of those concerns could have an impact on the parties’ tax returns and tax liability.

What about income taxes in Tennessee divorce?

To get started with tax issues in divorce, take some time to examine:

Divorce and Taxes | Tennessee Divorce Law & Tax Resources

and

Dependency Deductions & Tax Exemptions in Tennessee Parenting Plans,

both by Memphis divorce attorney and CPA, Miles Mason, Sr.

If a divorce is in the wind, read on. What follows are a few tax considerations to keep handy when hammering out the details of a settlement or as trial preparation begins.

Tax Issues for Divorcing Spouses

Divorce can be costly in many ways. Why compound the financial burden on yourself by ignoring or failing to anticipate income tax consequences?

Here are two tax issues (there are others) raised by divorce and legal separation in Tennessee and elsewhere.

1. Filing Status:

The taxpayer’s income tax rate is tied to his or her filing status. With divorce, the person’s filing status will change to “Single” or “Head of Household.” If the divorce is not yet final on December 31 of the tax reporting year, however, then the person is either “Married Filing Separately” without the other spouse; or “Married Filing Jointly” with the other spouse. Simply putting an “X” in the filing status box of the return could place the taxpayer in the highest tax bracket (Married Filing Separately) or lowest tax bracket (Married Filing Jointly).

Filing income taxes jointly while hostilities are palpable may seem impossible, but for financial reasons it could be beneficial for both parties to do so. (Joint filing could also be problematic. Note the discussion on alimony taxation below for a contrary position.) Highly experienced divorce attorneys routinely handle these tax issues during negotiations and, if need be, through litigation.

Remember, the individual’s marital status on the last day of the year determines the filing options available under the Internal Revenue Code. (For more detailed instructions, see IRS Publication 504 on preparing tax returns for divorced or separated individuals.)

2. Tennessee Alimony: 

If certain criteria are met, alimony can be taxable as income to the recipient spouse or former spouse. But that is not the end of the tax inquiry, by any means. When alimony is front loaded, meaning it pays big in the three years immediately following the divorce, the IRS may consider it a property settlement and not spousal support. This can trigger the alimony recapture rule and it could interfere with the payor’s desire for a large alimony deduction.

Furthermore, for the payor to deduct alimony from income, the payments must be made in cash (not goods, property, or services) according to the parties’ separate maintenance agreement or divorce decree. The payor cannot file a joint tax return with the other spouse either. Jeff Landers, a long-time contributor to Forbes.com, offers some insight into that very situation with his Tax Tips for Women Going Through Divorce.

The tax treatment of alimony is far more complex than “whoever pays gets the deduction.” Is anything ever that simple when taxes are involved?

The IRS keeps a very close eye on anything labeled “alimony” to assure that the tax rules regarding spousal support are complied with. Because there are so many technicalities, it is always advisable to utilize the services of a tax professional. (Click here for a directory of Memphis TN divorce CPAs and tax professionals.)