Tax Time is Over - Or Is It?

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Tax Time is Over - Or Is It?

Whew! One more tax season under the belt along with a few more divorce stories to add to my collection. Here's one that I'd like to share, along with the lessons to be learned. No actual names have been used and I've combined bits and pieces from other situations here and there to present a complete idea.

The Cheap Divorce

He didn't want to spend a lot of money on a divorce lawyer and called the guy with the ad in the TV Guide that said "Get divorced for $125!" Now I'm not an advocate of spending lots of money on lawyers, but I also don't believe in pounding good money in the sand either. And that's just what this guy did when he paid his "cheap" divorce lawyer to get divorced this past June.

His wife got primary physical custody of their two children and he was ordered to pay "chart" child support, half the daycare, all of the health insurance costs, and half their medical expenses. That was okay with him as long as he got to see his kids when he wanted, which he did. She got to keep the house - he didn't want his kids to have to move or change schools.

He was happy with his cheap divorce -- until he learned that he owed the IRS more than $6,000 and the state about a third as much - over $8,000 total for 2002.

"How did this happen?" he asked.

The answer: "Because your ex-wife received primary custody of your children and you didn't have physical custody of your children more than half the year. More importantly, because the divorce settlement doesn't deal with any tax issues rising from your marriage. As a result, your ex-wife gets a special filing status, the tax exemptions and all the tax credits that go along with having dependent children. The only benefit you got was being able to claim a deduction for the cost of health insurance and any of your children's medical expenses that you pay, but only for the amount that exceeds 7.5% of your adjusted gross income."

Would a more expensive divorce lawyer have handled his divorce better? Probably, but it's not a guarantee. Some divorce lawyers deal with divorce tax issues as a standard practice while others try very hard to not turn over any rock they might not understand too well i.e. income tax stuff. In any event, if his settlement agreement had dealt fairly with those tricky tax issues he wouldn't now owe over $8,000.

Following our suggestion, he contacted his ex-wife to see if she would cooperate with him to help him save tax money, especially since she was in a much lower tax bracket than him. He even offered to reimburse her for her tax loss and the cost of doing an amended return, if she would only let him claim the children as dependents on his tax return for 2002. Well, she had received a whopping refund that was even more than what had been withheld from her check and wasn't about to help him out.

Morals of the Story

Tax time is all the time, all year long if you are getting a divorce.
If you are getting a divorce you have a responsibility to make sure that tax issues - past, present and future - are all dealt with in your divorce agreement.
If you go to trial, ask your lawyer to tell you how they will be handled by the Court. Do you have to present evidence? Does the Court have the power to enter any ruling about income tax issues?
Don't rely upon your divorce lawyer to do everything necessary, dot all the i's and cross all the t's. Get educated about divorce and taxes. Be proactive in the management of your divorce case.
And, if you hire a "TV Guide lawyer" to handle your divorce expect to have future unpleasant surprises.

Check back next month for the story about the couple who took money out of IRA's to pay credit card debt so they wouldn't have any debt after their divorce. In the meantime, if divorce tax issues concern you, read more about 100+ Tax Tips for the Separated, Divorcing and Divorced or Tax Tips for Non-custodial Parents.

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Disclaimer

The author and publisher of this article have done their best to give you useful and accurate information. This article does not replace the advice you should get from a lawyer, accountant or other professional if the content of the article involves an issue you are facing. Divorce laws vary from state-to-state and change from time-to-time. In addition, it is a very fact-specific area of the law, meaning that the particular facts of your marriage and divorce, as well as other external factors may determine how the law is applied in your situation. Always consult with a qualified professional before making any decisions about the issues described in this article. Thank you.

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