March 13, 2013

Five Tax Related Traps to Avoid During Your Georgia Divorce

Once again, we have entered the season with which many accountants have a love-hate relationship: Tax Time. Although it may not be apparent on first blush, there are several tax consequences associated with divorce. These tax consequences can only be appropriately addressed if you are aware of them. Without adequate knowledge, it is very possible to fall victim to one of the five tax related traps outlined below. This is why it is extremely important to consult with an attorney who specializes in family law, specifically divorce, to help you navigate through the divorce process in Georgia.

1. Failing to have an institution-to-institution transfer of retirement funds and therefore having to pay taxes on those funds. Do you know how to correctly transfer qualified retirement funds upon divorce to avoid taxes? Speak with your divorce attorney regarding Qualified Domestic Relations Orders to see if one may be necessary to divide and transfer retirement funds upon your divorce.

2. Not knowing when you can withdraw retirement funds from a retirement account without paying a 10% penalty if you are younger than age 59 1/2. Attorney fees are not the only costs of divorce. Financial missteps during divorce can easily overshadow the known costs.

3. Failing to realize that your alimony will be taxed. If you are seeking alimony in your divorce matter, it is absolutely essential that you know that alimony is deductible to the payor and treated as taxable income to the recipient spouse.

4. Failing to have tax credits and refunds or capital gains or losses carried forward as divisible assets listed in the Marital Dissolution Agreement or Final Decree or Divorce. Do not forget about those assets. If you do, you may unintentionally give your ex-spouse a parting gift. Paying attention to details is vital during divorce.

5. Not deducting your attorney fees that are attributable to receiving alimony or retirement funds, if you qualify. Do you know if you qualify? This information can potentially save you hundreds or thousands of dollars.

If you are currently contemplating or going through a divorce here in Georgia, and you want to ensure that you do not fall victim to any of the traps outlined above, speak with one of our experienced divorce attorneys at Meriwether & Tharp. The members of our Atlanta Divorce Team will be able to offer you sound advice to guide you through every aspect of the divorce process.

By A. Latrese Martin, Associate Attorney, Meriwether & Tharp, LLC

May 2, 2011

Georgia divorce and tax liability

The Supreme Court of Georgia recently reversed a decision of the trial court in a divorce case, which made certain directives regarding the parties’ tax liability. Symms v. Symms, S10F1783 (2011). During the final hearing in that divorce case, there was testimony that “the parties had failed to report income from the [wife’s] photography business for the purpose of the assessment and payment of income tax.” Id. at 2. The trial court's final judgment and decree of divorce included several provisions addressing tax issues, including, but not limited to, ordering the parties to amend four years of income tax returns (for which the court specified exact dollar amounts to be used for income) and ordering that the parties be equally responsible for any tax liability and/or penalties. Id. The husband appealed, arguing, “the superior court exceeded its authority in ordering the filing of amended tax returns reflecting the legal determination of joint and several liability and the factual determinations of income.” Id. at 3.

The Supreme Court of Georgia agreed, stating generally “our State Courts are not authorized to impose income tax liability.” Id., quoting Blanchard v. Blanchard, 261 Ga. 11, 15 (1991). Specifically, the Court held that ordering the parties to be jointly and severally liable for any tax liability or penalties was “premature because of the Husband’s contested claim that he qualifies as an ‘innocent spouse’,” and that he is entitled to an IRS determination of his status as such. Id. at 3. In addition, the Court held that the dollar amounts that the trial court ordered be reported on the amendment of the previous tax returns were “either largely speculative…or blatant misrepresentations” with no accurate documentation backing them up. Id. at 4. Thus, the portion of the final judgment and decree of divorce related to the parties’ taxes could not stand.

January 12, 2009

Benefits of Mediation

Mediation is one option for resolving a family law case. In mediation, the parties and their attorneys meet with a neutral, third party mediator to help them resolve the outstanding issues in their case. Our firm has been very successful in resolving cases through mediation and there are many benefits to the process.

At mediation, parties can get things through negotiation that they would not be able to get from a Judge at trial. A good example of this is the dependency exemption on tax returns. Under the IRS regulations, the custodial parent is entitled to the dependency exemption. Thus, a Judge cannot award this benefit to a non-custodial parent. Many times, however, a non-custodial parent will benefit more from the dependency exemption than the custodial parent and may even be able to have more expendable money to pay in child support if given the exemption. In that case, the custodial parent can use the dependency exemption as a bargaining tool and give it to the non-custodial parent in exchange for something else during the mediation process.

Parties are usually happier with the results at mediation as compared to trial because they have some control over the outcome. When you go into a courtroom, your case is in the hands of a Judge who will listen to evidence and make a ruling on the issues. Many times, this results in both parties being unhappy to some extent. At mediation, you exchange offers with the opposing party and come up with unique solutions that a Judge may not consider.

Continue reading "Benefits of Mediation" »

December 6, 2008

Divorce and Taxes

This blog entry regarding tax issues related to a divorce is intended to alert you to issues to think about and provide some basic information. Before you sign any tax return or take any action with respect to your federal or state income returns, please review your situation with your current tax advisor.

Change of Mailing Address
You may officially notify the I.R.S. that you have changed your mailing address from the address used on your last tax return by filing I.R.S. Form 8822.

Spousal support or alimony is taxable to the recipient and deductible from the income of the payor if all I.R.S. requirements are met. Lump sum alimony is not deductable. For more information see Divorced or Separated Individuals - IRS's Form 504.

Child Support
Child support payments are not deductible from the income of the payor or taxable to the recipient. For more information see Divorced or Separated Individuals - IRS's Form 504.

Dependency Exemption for Minor Children
Unless specifically addressed in your Decree, generally the custodial parent will be entitled to claim the dependency exemption for the minor children on his or her income tax return. The custodial parent may execute I.R.S. Form 8332, releasing the dependency exemption to the non-custodial parent. Release of Claim to Exemption
for Child of Divorced or Separated Parents - I.R.S. Form 8332.

Continue reading "Divorce and Taxes" »

November 22, 2008

Taxation of alimony and the recapture rule

Although child support is not deductible by a payee, alimony is generally deductible by the payer and must be included as income to the payee. While many attorneys provide this advice to their clients, there is one often overlooked exception to this alimony rule that should be carefully examined during a divorce case. In particular, if alimony payments decrease or terminate during the first three calendar years, you may accidently find yourself subject to the alimony recapture rule. If you are subject to this rule, you will have to include as income in the third year part of the alimony payments that you have previously deducted (and your former spouse can similarly deduct in the third year part of the alimony payments that were previously included as income). As pointed out by IRS publication 504:

“You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year.”

If you are considering paying/receiving alimony as part of a divorce and think you may fall within this exception, we strongly urge you to seek the advice of a tax professional you trust to provide you guidance in this complex area.

For more information we recommend you start by reading IRS Publication 504 and consult with a tax professional.

November 14, 2008

Deductibility of legal fees related to a divorce

Although generally you cannot deduct legal fees you have incurred in obtaining a divorce, there are several exceptions that you should consider talking with your tax professional about in more detail. In particular, you may be able to deduct fees paid for tax advice (subject to the 2% of adjusted gross income limit) you received in connection with the divorce, such as from appraisers, accountants and attorneys if you itemize deductions on Schedule A (Form 1040).

Interestingly, because alimony is considered income, you may also be able to deduct fees incurred in helping to obtain an alimony award.

In addition, certain legal fees you pay specifically for obtaining property, such as the cost of preparing and filing a deed in your name, may enable you to increase the basis of the property you receive.

One thing is clear, if you plan to try and deduct fees related to tax advise obtained during a divorce or fees incurred in obtaining alimony, you must make sure that your charges are clearly broken down in such a manner that you can determine charges that are deductible and charges that are not deductible.