April 15th, the day you must file your tax returns or request an extension, is fast approaching.  If you and your spouse separated during 2015, you may be wondering how to file your taxes.   If you were not divorced on or before December 31, 2015, the IRS considers you married for 2015, even if you lived separate and apart for the majority of the year.   Therefore, you must either file a joint tax return together or you each can file your own married, filing separately tax return.   If you entered into an Separation Agreement that addressed how tax returns would be filed then your Agreement will dictate how to file.  Absent an Agreement that addresses tax filings, then you likely have a choice whether to file jointly or married filing separately.

For many families, filing a joint return will result in the most tax savings for the family as a whole. However when it comes to cash refunds and cash flow, there may be reasons why it benefits some spouses to file married filing separately.  Thus, it is important that you first consult any Agreement you may have, and then consult with your accountant and/or family law attorney to review your options.   If you decide to file separate returns, be aware that only one parent can claim head of household and/or dependency exemptions related to the children.  Therefore if you do not already have an agreement with regard to these issues it is important to communicate with your spouse just prior to or shortly after filing to avoid you both claiming the exemptions.  If both you and your spouse claim the dependency exemptions you may be more likely to be audited.   If you both claim the exemptions it is likely that the spouse who filed their return first will get the benefit of  the exemptions.   

If you file married filing separately, you and your spouse can later on decide to amend to file a joint return.  If you file a joint return, you cannot later amend to file married filing separately.  But be aware that if on April 15th you file for an extension, rather than filing your actual return,  the act of an extension may later prevent you from amending your married filing separately return to a joint return.  Before filing for an extension you should consult with your accountant for advice regading any impact the extension will have on your ability to amend your filing later on.    

Your tax returns provide us with information about your income and the source of income, income producing assets, and your investments, as well as whether you over or under withhold taxes from your paycheck.  This information enables us to provide better advice in regard to division of assets and payment of support. Review of your tax returns is an integral part of your family law case; the attorneys at Hess Family Law ask that you provide us with your past tax returns.  How many years of returns will depend on the issues in your case, but almost always we want at a minimum the past three years.

We can obtain copies of tax returns through the court discovery process if you do not have them.  Other ways of obtaining copies of your tax return may include asking your tax preparer to provide copies, or obtaining copies from the IRS.  To obtain a copy of your previously filed and processed tax return with all attachments, including Form W-2, you should complete Form 4506, Request for Copy of Tax Return, along with a $50.00 fee for each tax return requested.  You have to allow 75 calendar days for the IRS to process your request.  Tax Returns are generally available for returns filed for the current and past six years.  On jointly filed tax returns, either spouse may request a copy and only one signature is required.

Oftentimes we don’t want to wait 75 days for the tax return to arrive, and/or it is cost prohibitive to pay $50 per tax return.   The solution may be to order a Tax Return Transcript instead of the actual Tax Return using Form 4506-T.  You can request your tax return transcript online directly from the IRS rather than making a request by mail.  For a short time the IRS allowed individuals to obtain immediate transcripts of prior tax returns, by online download.  However, due to security measures the ability to download a copy of your tax transcript has been suspected.  It should take between 5 and 10 days to receive your tax transcript through the mail. Click here to learn how to obtain your tax transcript.   

If you are separated or divorced there may be tax implications related to your new relationship status.  At Hess Family Law we can work with your existing tax preparer, or we can refer you to and work together with a new tax preparer to assist with separate and divorce tax implications. 

Efile.com suggests these tips for you to consider when filing your annual taxes.

Filing Status:

Your marital status as of December 31^st of each year controls your filing status for that year.   If you were still married on December 31, 2014, and you do not have an Agreement that specifies how you will file, you have two options:  file a joint return or file married filing separately. If you were divorced during 2014, you cannot file a joint return.  If you do not have an Agreement that addresses who may file as Head of Household, you can file as Head of House of Household (and get the benefit of a bigger standard deduction and more advantageous tax brackets) if you had a dependent living with you for more than half the year and you paid for more than half of the upkeep for your home. Otherwise, you may need to file as a Single tax payer.  Hess Family Law recommends you consult an accountant to determine the best way for you to file your taxes.

Dependent Exemptions:

Who claims the kids?  If you have an Agreement or Court order stating who claims the kids then the matter is resolved.  If you do not have such a document and you are the custodial parent you may claim your children as dependents for tax purposes.  The IRS considers you a custodial parent if your child lived with you for a longer period of time during the year than with your former spouse.  Regardless of your custodial arrangement, you and your ex-spouse can agree who claims the children as dependents.   In this instance the custodial parent must sign a waiver stating that he/she will not claim the deduction. 

     Your divorce proceedings have concluded and you have paid your final attorney fee bill. Wondering if any of those fees are deductible on your personal income tax return? The general rule is that a taxpayer may not deduct attorney fees incurred in connection with a divorce or separation because this matter is considered to be personal and the Internal Revenue Code does not permit the deduction of personal, living, or family expenses. I.R.C. § 262(a). However, there are exceptions to this rule that may allow you to deduct some of your legal expenses related to your divorce, so long as you plan to itemize your deductions and your total miscellaneous deductions exceed 2% of your adjusted gross income (AGI). If you do not itemize deductions or your deductions do not pass the 2% adjusted gross income test, then you cannot deduct these fees.

     Alimony Related Legal Fees:

     IRC §212(1) allows an individual to deduct ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income. A spouse seeking taxable income, such as alimony, may deduct a portion of their legal fees related to his/her alimony claim because alimony is includable in the recipient’s gross income. A spouse may also deduct legal fees and expenses associated with a modification of alimony or to collect alimony arrearages. Additionally, if a spouse seeking alimony incurs accounting fees relating to their claim for alimony those accountant fees may also be deductible. Fees incurred to hire a vocational expert, to the extent the fees relate to obtaining alimony, may also be deductible. In order to deduct legal fees relating to a claim for alimony, the alimony recipient should pay all deductible legal fees in one year.

     It is notable that a party defending against an award or collection of alimony cannot deduct his or her legal fees, nor can either spouse deduct legal fees associated with the collection of child support.

     Fees Related to Tax Advice:

     IRC §212(3) allows an individual to deduct ordinary and necessary expenses paid or incurred during the taxable year in connection with the determination, collection, or refund of any tax. Some examples of advice that may be allocated to tax planning or production of income are:

•  Tax advice concerning the rights to claim dependency exemptions;
•  Characterization and treatment of alimony obligations;
•  Costs of determining the adjusted basis of assets in the property settlement;
•  Costs of obtaining advice regarding the tax consequences of divorce or separation instrument; or of  gathering information for actual preparation of tax returns; and
•  Costs of securing an interest in a qualified retirement plan (such as those paid to divide your and your former spouse’s defined contribution plans).

     For legal fees incurred in connection with a divorce to be deductible, your attorney must determine what portion of the fee is allocable to tax advice as opposed to non-deductible advice or other services and render an itemized bill. According to IRS Revenue Ruling 72-245, the agency will accept a lawyer's allocation of his or her fee between tax and nontax matters where the attorney allocates primarily on the basis of the amount of time attributable to each, the customary charge in the locality for similar services and the results obtained in the divorce negotiations.

Note: This information is general in nature and should not be construed as tax advice. You should consult with your tax accountant

(01/29/14)

Are My Legal Fees Deductible?

     Many clients wonder if the attorney fees they have incurred during their divorce are tax deductible.  Generally, the IRS says no.  According to Internal Revenue Code (IRC) § 262 (a), personal, living, or family expenses are not permissible deductions.  Therefore, a spouse may not deduct attorney fees incurred in connection with a divorce or separation because these matters are considered to be personal.  However, there are exceptions to this rule.

     Legal fees in connection with advice regarding alimony qualify as a legitimate legal fee deduction.  Why?   IRC § 212(1) allows a deduction for expenses incurred for the production or collection of income.   Therefore, those legal fees attributable to obtaining alimony or incurred to collect alimony arrears are deductible.  However, attorney fees incurred by a spouse to defend an award or collection of alimony are not deductible.

     Another legitimate deduction is for expenses related to tax advice.  IRC § 212(3) allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in connection with the determination, collection, or refund of any tax.  In the context of a divorce case, this means advice regarding transfer of property; dependency exemptions; characterization and treatment of alimony obligations; and income, estate, and gift tax consequences resulting from a trust to discharge an alimony obligation are permissible deductions to the taxpayer who incurs these expenses.

     If you are planning to deduct some of your legal expenses, your attorney will need to determine what portion of their bill relates to deductible advice and provide an itemized bill.   Otherwise, your legal fees will likely not be considered legitimate deductions by the IRS.  Since tax laws continually change it is important to consult with your attorney and/or a tax professional for specific tax advice.

(09/23/13)