Throughout each family case there are several tax implications that come to pass. Below is a brief outline of the most common tax implications:
Property Transfers: Per the Internal Revenue Code section 1041, transfers of property between former spouses as an incident of divorce is tax free. No gain or loss is recognized on such transfers. Incident to a divorce means the transfer occurs within one year of the marriage ceasing and is related to the cessation of the marriage (such as through a Judgment or Marital Settlement Agreement). Except in very limited circumstances, this section applies to any type of property, however and whenever acquired.
Spousal Support: Per the Internal Revenue Code section 71, alimony or separate maintenance payments are deductible by the payor and taxable income to the payee.
Child Support: Unlike spousal support, child support is neither deductible by the payor nor taxable income to the payee. The amount of child support paid has not impact on the issue of which parent may properly claim a child as a dependency exemption.
Dependency Exemption: Per the Internal Revenue Code section 152, the parent who has physical custody of a child for the majority of the year is entitled to claim the child as a dependency exemption unless that parent executes a written waiver enabling the noncustodial parent to claim the exemption.
Filing Status: If the parties are divorced by the last day of the calendar year, then the parties are limited on their tax filing choices to either single or head of household (if qualifying children are present). They may not file as married either jointly or separately. However, if the parties are married on the last day of the calendar year, even if separated, the parties have several choices for filing. They can file a joint tax return, file separate tax returns by filing married separately, or file head of household (if qualifying children are present) and the other married separately. Neither party can file single.