Divorce & Marriage Issues

For 2011, there is no phase-out of itemized deductions regardless of your adjusted gross income. The same no phase-out rule will apply to 2012.

Transfers of any property between spouses that are incident to a divorce are treated as tax-free exchanges, and as a result, it is not reportable or taxable.

Not necessarily. Cohabitation may be technically illegal in your state. The IRS will follow the state law in determining whether your relationship is in violation of any state domestic law. When no local law is violated, a dependency exemption is allowed.

The cost basis of assets transferred from one former spouse to another is the donor's basis. The recipient spouse may have to pay tax if there is appreciation of the asset at the time it is sold.

In a divorce settlement, retirement funds are subject to division between the spouses. A Qualified Domestic Relations Order is a legal directive to the administrator of the pension, IRA or other retirement funds, to pay a specified amount of money to a former spouse or child. These payments are exempt from the early withdrawal penalty. If payments are made to the former spouse, the spouse may defer tax on the payments if they are rolled into an IRA within 60 days. If a payment is made to a child, that amount is taxable to the former spouse whose retirement funds were taken.

The parent having custody of the child is always entitled to the dependency deduction, unless the custodial parent waives his or her right.

You must file Form 8857 to claim innocent spouse relief. This must be filed within two years from the date the IRS collection division advised you of a tax liability for the joint return filed by you and your former spouse.

Innocent spouse relief refers to rules that allow a spouse to seek relief from the IRS. Under this law, the spouse can escape from personal liability for tax returns filed jointly during the marriage if he or she had no knowledge that the tax was not paid or partially paid.

Legal fees for the divorce itself and the property settlement are not deducible. However, legal fees to collect taxable income such as alimony are deductible as miscellaneous itemized deductions on Form 1040, Schedule A.