Important Tax Advice If You're Going Through a Divorce
My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances. Today I'm gonna talk about tax advice when you're getting divorced.
When you get a divorce, it's extremely expensive, and there's a lot of little things that you may not know or your accountants may not know if they don't deal with divorce issues a lot. But the first one is, if you're getting divorced and you're paying a lawyer, you're paying accountants, and everybody else, make sure you get itemized bills. Because lawyer advice, typically, is not deductible on your tax return unless it has something to do with tax advice. So if you get a detailed bill from your lawyer and he's saying, "Well I spent 40...you know, I billed you $10,000 and 40% of the time was spent on, you know, this tax situation or that...," well you get a $4,000 deduction. It's gonna go a long way to helping you pay that bill.
Another thing that you may wanna just jot down is that depending on a settlement, any property settlement, when you get divorced, sometimes one spouse will give property to another, you may have to file gift tax returns. And again, pretty complex area, but I just want you to be aware that you may have a requirement to file gift tax returns. The other thing is the IRS loves to challenge alimony. And why do they like to challenge alimony? Because it's a deduction on your tax return if you're paying it and it's income in the other return. And the IRS is always concerned about cost shifting. Hey, maybe they're just trying to shift, you know, reduced taxes as a unit, you know, and I've gotten involved in cases where the IRS has sent letters and say, "Hey, we wanna take a look at your alimony, see, one, if you're paying it, see if you're meeting all the requirements of alimony." And there are five requirements to alimony, and if you don't meet those five, they can challenge it. So just be aware of that.
The other thing is, really important, is when you're getting divorced, sometimes your spouse may be doing things that you're not aware of financially that could be jeopardizing you, and I tell, you know, clients that, "You may wanna file a married filing separate return if you think there's an issue with your spouse." Because if you file a separate return, you bifurcate yourself from them, okay? They're gonna be responsible for a tax fraud or whatever they're doing on their return. Unfortunately, it will probably cost more to file a married filing separate return, but the good thing is if you reconcile and you decide not to get divorced, you can always amend those and file a joint return. You can't do it the opposite way. You can't file amend it. You can't file a joint return and then amend to file a marriage filing separate return. Lotta people don't realize that. It never hurts to file a married filing separate return because you can always go back and amend and file a joint return. You only have three years to do it, but it can be done. Something you may wanna suggest to your tax adviser or your attorney.
The other thing is simple, you know, but it's important because I know a lotta people get letters, they're getting divorced and they get letters in the mail from the IRS to their spouse. You know what they do with those letters? They rip 'em up and they toss 'em in the trash can. So if you're getting divorced, you should file form 8822 which will say, "Hey, I'm living at this other address. If you have correspondence to me, please send it to this new address," because guess what, if you're in a hostile divorce and your spouse gets certified letters, you're not gonna get them in all likelihood.
Injured Spouse Allocation. Now this is different than Innocent Spouse Relief. A lotta people confuse the two. Okay, this has to do with refunds, like let's say you file a tax return together and you have a $5,000 refund, it's going into your joint bank account or you husband's bank account, and you're getting divorced, and, you know, you're not talking to your spouse. He's gonna get that $5,000 refund because it's going to his bank account. But if you file this 8379, what that will tell the IRS to do is, "Hey, that $5,000 refund, only put 2,500 in his account and put 25 in my account because, remember, you were happy, all of the sudden you're getting divorced, those refunds haven't come in yet, you may wanna file this return to allocate the refunds.
The other thing is an easy way to save...sometimes I've helped people save up to $30,000 on tax returns when in a divorce just by proper planning of the deductions for the kids. Because the way the code is set up, the Internal Revenue Code, is that sometimes the spouse with the least income gets the most benefit by claiming the children because there's all kinds of plans the IRS has or the Congress has that they run through the tax code in order to get refunds.
Okay, earned income credit. You can get up to $8,000 refund if it's properly structured. Sometimes the spouse with the income should not claim the kids. Sometimes the, you know, the spouse without the income should get the deduction for the kids, and this planning, like I said, can save you up to $30,000. Also you have to be aware that when you're receiving alimony, if it's not properly structured, you can...may be forced to recapture the alimony. So again, just be careful if alimony's changing or fluctuating, you may wanna talk to your tax adviser, say, "Hey, is there a chance here that I may have to recapture this alimony?"
The other one is...the next one is Innocent Spouse Relief, form 8857. And what this does is if your spouse has legal issues with the IRS and you file the joint return, technically you're both responsible for that return. What this does is it notifies the IRS that, "Hey, you know, I wasn't involved in the cash business. I signed the returns but I wasn't aware my spouse was doing this." Not always 100% effective, but it's worth filing if you think...because you don't wanna have to go to the penitentiary because of something your spouse did that you weren't aware of. So important to do this, to file that form.
And last, once your divorce, file a W-4 with your current employer just to notify them that, "Hey, you know, I'm not married. I wanna change my dependence or whatever," so that the proper amount of withholding is taken outta your W-2 so at the year end, you don't have any surprises. Thank you for listening. If you have any questions or, you know, feel free to call me or email me.