The resolution of a number of divorce and family law matters, whether by agreement or litigation, implicates a host of tax-related issues for the parties involved. The Internal Revenue Service rules and regulations involved are complex, detailed, full of exceptions and qualifications, and subject to change. While parties are encouraged to consult an accountant or tax attorney if specific tax questions or issues arise, a few of the general precepts related to divorce and family law matters are as follows.
The transfer of property between spouses incident to a divorce normally is without tax consequence. The party receiving property does not receive a stepped-up basis, and will bear the full capital gains consequences upon a subsequent transfer.
The IRS defines alimony – known as spousal support in Virginia – as a payment to or for a spouse under a divorce or separation instrument if the spouses do not file a joint tax return with each other and all of the following requirements are met:
- The payment is in cash;
- The instrument does not designate the payment as not alimony;
- The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance;
- There is no liability to make any payment (in cash or property) after the death of the recipient spouse;
- The payment is not treated as child support.
Spousal support does not include child support, noncash property settlements, payments that are a spouse’s part of community income, payments to keep up the payor party’s property, or the use of the payor’s property.
Subject to many qualifications, spousal support granted prior to January 1, 2019, is deductible to the payor party and taxable to the payee party for federal and state income tax purposes. Generally, spousal support granted after January 1, 2019, is neither deductible by the payor party nor included in the payee party’s income for income tax purposes.
Child support is not deductible to the party paying it, nor taxable to the party receiving it.
The child dependency exemption can be allocated by the court to either parent. If there is no ruling or agreement to the contrary, the party with physical custody of the child may take the exemption.
Attorney's fees associated with obtaining spousal support are deductible, subject to specific rules and limits.
Attorney's fees associated with obtaining or protecting capital assets may be added to the basis of those assets.
The following are some common legal and factual tax issues related to divorce and family law matters:
- Must parties continue to file joint tax returns after separation but prior to divorce?
- Are tax consequences related to property transfers and/or holdings considered by the court when deciding equitable distribution issues?
- Are parties permitted to alternate the child dependency exemption regardless of physical custody arrangements?
- Are property taxes and income taxes considered for purposes of deciding child and/or spousal support?
- Are property taxes or income taxes owed treated as marital or separate property?
To view statutory law relevant to tax issues in family law matters, follow this link to Code Section.
To view case law relevant to tax issues in family law matters, follow this link to Case Finder.
To obtain legal advice concerning tax issues related to divorce or other family law issues, please contact Raynor & Farmer, P.C.