All facts and figures in this article and/or interview may be relevant to this date only and may not apply or be relevant today.
Please contact Patricia (Trish) Goodman for more information.
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The Oklahoman, April 2, 2006 Tax implications grow with divorce
By Paula Burkes Erickson
Business Writer
About 36,000 Oklahomans may be dreading the looming April 17 tax deadline even more than usual
this year. Based on numbers from the state Health Department, that's roughly how many were granted
a divorce last year -an event that comes with its own headaches at tax time.
For starters, many people who receive alimony from their ex-spouses often have no idea -- until it's
time to file their tax returns -- that they have to pay taxes on the alimony.
"It's the biggest pitfall in divorce cases," Oklahoma City tax attorney Ken Klingenberg said. Even if
divorcees are told alimony is taxable, it often doesn't register, he said.
"Maybe because of the emotional stress they're under, people ignore it," Klingenberg said.
Consequently, they forget to set aside roughly 30 percent of their alimony for the taxes due.
In general, spousal support ordered under divorce decrees is taxable to receivers and tax-deductible for
payers. The Social Security numbers of recipients must be included on payer's tax return.
Meanwhile, child support and property settlements carry no tax consequences.
Still, the widespread tax implications of divorce can be complicated. Issues range from what's the
proper filing status to who gets to claim the children as a dependent.
Whether a divorce decree is signed July 15 or Dec. 31, taxpayers are considered divorced for that
tax year, said David Stell, Oklahoma spokesman for the IRS.
If a divorce is pending, most experts recommend couples file joint returns if possible. That's because
married taxpayers who file separately usually owe more tax, Stell said.
Separated spouses should be aware they can file as head of household, if they paid more than half the
cost of keeping up a home for the entire year, their spouses didn't live in the house the last six months of
the year and they have dependent children.
The election recently helped one of his clients go from owing taxes to having a refund, said Pete
Terranova, Oklahoma City certified public accountant.
A head of household's standard deduction alone is $2,300 greater than for "married filing separately,"
he said. In addition, there are $4,400 in potential earned income tax credits, which aren't available to
taxpayers who are married filing separately. The credit can erase taxes owed or give a refund.
In acrimonious marital situations, the IRS regularly sees parents attempt to claim the $3,200
exemption, $1,000 child tax credit and deductions for child care expenses for the same children, Stell
said. Generally, the custodial parent, or parent with whom the child lives, receives the tax incentives,
he said.
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All facts and figures in this article and/or interview may be relevant to this date only and may not apply or be relevant today.
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Divorce decrees can grant exemptions to noncustodial parents. But custodial parents must sign
declarations that they won't claim the exemption, Stell said. The declaration -- IRS form 8332 -- must
be attached to the return.
Ideally, the form -- which can be signed for a yearly or indefinite basis -- is completed when a divorce is
finalized, Klingenberg said.
In joint custody cases, the question of which parent can claim the exemption comes to down to who has
the child in their home the most number of days, he said. If time shares is the same, the parent with the
higher adjusted gross income (AGI) can claim the incentives.
"There are a lot of issues that nonworking spouses should be on the lookout for," said Trish Goodman,
an Edmond certified financial planner and one of a handful of certified divorce financial analysts in the
state.
For example, there may be an advantage in receiving a share of an ex-spouse's retirement and/or
pension assets versus accepting the equity in a home, Goodman said. Or a greater property settlement
may be more advantageous than taxable alimony payments.
What at first seems fair, may not be, Goodman said. For example, homes, she said, come with tax
implications -- from annual real estate taxes to capital gains taxes owed, if and when they're sold.
"My role is to quantify what each settlement option will look like and make 'what if' adjustments to help
divorce attorneys reach an equitable division for their respective clients," Goodman said. "If I do my
job right, the case should never have the expense of going to court over financial issues."
In general, women worry too much about keeping their "nests" for their children and not enough about
their retirement, said Rebecca Hadler, a registered financial consultant with Access Financial
Resources.
"They learn to manage through the alimony time frame," Hadler said, "but many are dangerously
close to bankruptcy between the end of alimony and the time they can access retirement income."
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May we help you? Please call our office at 330-4015.