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Arizona divorce: Don't forget about the tax consequences

Benjamin Franklin is usually credited with being the first to note that death and taxes are the only things certain in life. A cynic might add divorce to the equation, though the most often cited statistics indicate that just about half of all marriages result in divorce. While an Arizona divorce may not be a foregone conclusion, what is certain is that it will trigger some tax ramifications. Those negotiating a final settlement of their marital dissolution would do well to consider the potential impact on tax obligations going forward.

The first consideration is whether a couple can file a joint tax return while they are divorcing. The operative date is December 31. If a couple are still married on that date, they are entitled to file jointly. If, however, their judgment of divorce is finalized on December 31 or any prior date, they are considered divorced for the entire year. As such, they may not file jointly.

In community property states like Arizona, the income earned by a couple is considered earned by both of them. Thus, one half of the income earned by a spouse while married is considered the income of the other, whether they file jointly or separately. During a divorce year, if a joint return as a married couple is not filed, each spouse must include one half of the community property earned, no matter which spouse actually made the money.

If children are involved, it is possible to agree to a division of the tax exemption available for each dependent child. The parties can also agree that the person who will receive the greatest benefit is entitled to claim the exemption. However, in any circumstance where a non-custodial parent seeks to claim the exemption, IRS form 8832 must be executed. That form is a formal release by the custodial parent of the right to claim the tax exemption.

Other issues remain. For instance, alimony (spousal maintenance) is tax deductible for the payer and reportable as income for the payee. Child support, on the other hand, is neither income to the payee nor deductible by the payer. And the fees paid in relation to obtaining a divorce are typically not deductible. While a divorce may not be as certain as death or taxes, it is certain to generate tax issues which are best addressed before the final paperwork is signed.

Source: The Orange County Register, "Tax decisions can be overlooked during divorce," Patrick Harper, Sept. 17, 2012

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