Treatment of Community Income Where Spouses Live Apart

During a divorce situation the responsibility to report and pay income taxes on all sources of community property can prove to be a heavy financial burden (see previous post re Reporting Income and Deductions on Separate Returns).  Fortunately, the IRS offers several sources of relief from this burden.  The first type of relief is offered by IRC § 66(a) which provides that the Community Property Laws with respect to earned income may be disregarded in certain situations if:

Reporting Income and Deductions on Separate Returns

If married spouses elect to file separate returns (see previous post re Filing Status While in Process of Divorce), each spouse should report only their own income, exemptions, deductions, and credits on their individual return (Reg. 1.66-1).  This reporting may be easier said than done, however.  It may not always be clear who owns what investment and its income stream and who paid and is eligible for which deductions.  The situation may be even more complicated if the spouses live in a community property state such as California.

Dependency Exemptions for Separated or Divorced Parents

Another issue individuals contemplating divorce must resolve is who gets to claim the Dependency Exemptions for the children.  In general a taxpayer may claim a Dependency Exemption for each child who is under age 19, or under age 24 if a full-time student, and lived with the taxpayer for more than ½ of the year, except for temporary absences including time away at school.  The child must not provide more than ½ of their own support, excluding scholarships received. 

Divorce and Separation Planning

Right after concern for the welfare of the children, the biggest concern during and after the divorce process generally relates to the fear of the unknown financial impact.  During the divorce process, costs generally rise dramatically as the spouses often incur new outlays for legal and forensic representation, emotional counseling services, and separate housing.  This stress is very negative and often results in much more acrimony than would otherwise be present.  One spouse generally is in the position of earning more and he or she is forced to “support” the other party, at first on a temporary basis and later on a permanent basis. 

Filing Status While in Process of Divorce

There are a lot of tough decisions to make in situation when your marriage is failing including if/when to separate, if/when to file for divorce, how to handle child support and alimony, child living arrangements, and the division of property.  A very important decision that is often overlooked at this time (i.e. before a divorce is final) is whether to file a joint income tax return or not?  This is an important decision with many tax and financial implications and should not be taken lightly.  Ideally, a professional accountant should be consulted.  In this post I will briefly summarize the filing status options and implications and cover the subject in more detail later. 

Introduction

Hello and welcome to my first blog post.  As noted in the “about” section the purpose of this blog is to provide support – primarily of a tax and financial nature, but occasionally pertaining to other issues as well – to separated and divorced individuals and their advisors.  I hope that this site can become a regular resource by providing not only good sound information in the blogs but also links to a variety of resources for individuals going through the same harrowing experience that you are.  I will be drawing from my many years of experience as a CPA and CERTIFIED FINANCIAL PLANNER™.  My firm White, Zuckerman, Warsavsky, Luna & Hunt is a leader in family law forensic accounting.