Los Angeles Divorce and Family Law

Divvying Up? Check Taxes

By ANNA PRIOR June 28, 2009 The Wall Street Journal

When divvying up assets in a divorce, make sure you consider what they would be worth after taxes. That's particularly important in community-property states, which mandate a 50/50 split.

"It's important to know that what you do has tax consequences for both parties," says Jackie Perlman, a tax analyst with the Tax Institute at H&R Block.

Take a couple that has an investment portfolio with stock and taxable bond funds that appear to have equal value, and one spouse gets the stock funds and the other the bond funds. Factor in capital gains or the fact that interest on bonds is fully taxable, and the values of those funds don't hold equal weight.

"All of a sudden, you don't have apples to apples anymore," says Amy Barrett, a certified divorce financial analyst in Rockford, Ill.

Another tax issue could arise when divorcing couples sell their house. If a couple bought a house a while ago, capital gains from a sale could be large despite the current housing-market slump.

If the house is in the name of just one spouse, any gain above $250,000 must be reported as taxable income, she says. But if the couple sell the house jointly, they can get a $500,000 tax exclusion. In some cases, Ms. Barrett says, that could wipe out any taxes owed.

Write to Anna Prior at anna.prior@wsj.com

Contact a Los Angeles Divorce Attorney at Law Offices of Warren R. Shiell

Call for a free consultation now 310.247.9913.

Divorce and Money

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Divorce Lawyers|Attorneys Los Angeles, Beverly Hills

California Prenuptial, Prenups

Property Division Issues in Gay Divorce

Law Offices of Warren R. Shiell, Los Angeles Divorce Lawyer

"The next same-sex challenge: divorce" published by Los Angeles Times By Sue Horton, July 25, 2008 

Around the country, same-sex couples are discovering that getting divorced can be far more complicated than getting married. Sometimes the problems stem from living in a state with different laws from the state where the marriage took place.

But even in Massachusetts and California, where married gay couples have the same right to divorce as heterosexual couples, a clash between federal and state laws makes the process anything but equal.

Because federal law defines marriage as being between a man and a woman, the federal government doesn’t extend many standard divorce benefits to same-sex couples. As a result, say lawyers familiar with the issues, even in states where gay couples are allowed to divorce, they face financial consequences that heterosexual couples don’t. Among them:

* If a judge orders a heterosexual couple to divide a pension during a divorce, federal law allows the pension to be divided without triggering early-withdrawal penalties. Divorcing gay couples must pay the penalties.

* Court-ordered alimony payments can be deducted from federal income taxes in straight divorces, but not in same-sex divorces.

* In gay divorces, when a judge orders one party to give money or other assets to a spouse, those assets may be subject to gift or income taxes.

* When real property is transferred from joint ownership to one gay spouse by a court order, capital-gains taxes are often triggered.

Opponents of same-sex marriage say the issues were to be expected.

“These problems illustrate why it is a bad idea to redefine marriage in California in a way that is at odds with the rest of the country,” said Andrew Pugno, legal advisor to protectmarriage.com, a coalition of churches, organizations and individuals supporting the California Marriage Protection Act on the November ballot.

Same-sex couples who choose to marry, he said, have to understand that “the federal government doesn’t recognize any marriage that’s not between a man and a woman.”

“They’ve given us no choice but to be married forever,” said Ormiston. “Their worst nightmare.”

Read full article

Law Offices of Warren R. Shiell, Los Angeles Divorce Lawyer

Taxes and Divorce - what qualifies for capital gains exclusion

Law Offices of Warren R. Shiell, Los Angeles Divorce Lawyer

An article from the San Fransisco Chronicle by Benny L. Kass, Saturday, August 30, 2008 Read article

Q: I was told by a prominent accountant that there is a loophole in the law that states that you can be exempt from paying capital gains (if you are in a home less than the two-year period) if there are "unforeseen circumstances" involved. Are you aware of this? At the time I was going through an "unforeseen" divorce.

A: In general, in order to take advantage of the up-to-$500,000 exclusion of gain ($250,000 if you file a separate tax return), you have to own and live in the house for two out of the five years before it is sold. But the law does allow a partial exclusion under certain circumstances.

There are three "safe harbors," meaning that if you meet these tests the IRS will not challenge you: 1) changing to a job that is at least 50 miles farther away; 2) major health problems; and 3) unforeseen circumstances. In this third category, if you could not have anticipated an event before you purchased your house, you may also be able to claim a partial exclusion.

While this is fact-specific - and in many cases you will have to get a special ruling from the IRS - there also are some safe harbors that the IRS will recognize. These include: an involuntary conversion of your house; natural or man-made disasters resulting in a casualty to your home; divorce or legal separation; and multiple births resulting from the same pregnancy. It would appear that you may qualify based on your divorce.

The exclusion is equal to the number of days of use times the quotient of $500,000 divided by 730 days. Note that 730 days is two full years. If you are single - or do not file a joint tax return - change the $500,000 to $250,000.

Your accountant knows what he is talking about, so you should ask him to do the calculations. But I do not think he said that you can escape all capital gains tax.

Law Offices of Warren R. Shiell, Los Angeles Divorce Lawyer

 

2007 Tax Tips

SOURCE: The State This year, the deadline is April 17 for federal and state returns.

If you were recently divorced and are paying or receiving alimony under a divorce decree or agreement, you need to consider the tax implication for your 2006 federal income tax return.

Alimony payments received from your spouse or former spouse are taxable to you in the year you receive them. Because no taxes are withheld from alimony payments, you may need to make estimated tax payments or increase the amount withheld from your paycheck.

Alimony payments you make under a divorce or separation instrument are deductible if certain requirements are met. Any payments not required by such a decree or agreement do not qualify as deductible alimony payments.

Child support is never deductible. If your divorce decree or other written instrument or agreement calls for alimony and child support, and you pay less than the total required, the payments apply first to child support. Any remaining amount is then considered alimony.

Dependency Exemptions

From the Kansas City Star - tax tips Kansas City Star . Also see my other blogs under divorce and taxes.

Q My divorce degree lets my ex-husband claim one of our two children on his tax return even though they both live with me. Since my ex-husband is behind on paying child support, can I claim both children?

A. Being behind on child support payments does not typically affect the right to claim a dependency exemption for a child.

With divorced taxpayers, the general rule is that the parent with custody of the child for the greater part of the year receives the dependency exemption as long as the child does not provide more than one-half of his or her own support.

If a child spends an equal amount of time with each parent, the parent with the higher adjusted gross income will receive the dependency exemption.

Of course, there are exceptions to this general rule.

One such exemption is with pre-1985 divorce decrees or separation agreements between parents, which grants the noncustodial parent the dependency exemption. In such a case, the noncustodial parent receiving the dependency exemption must provide at least $600 of support for the child during the year.

The other exception to the general rule is when the custodial parent releases the right to claim the dependency exemption for a child to the noncustodial parent. This transfer is granted by the custodial parent signing a written waiver. Generally, IRS Form 8332 is used for these purposes and must be attached to the noncustodial parent’s tax return for each year a dependency exemption for the child is claimed. The divorce decree can also be used if it addresses specific issues required by the IRS.

Additionally, for the noncustodial parent to claim the child on his or her tax return, the child must receive over half of his or her support for the year from one or both of the parents. Public assistance payments, such as Temporary Assistance for Needy Families, are not considered support provided by the parents. Also, the child must have been in the custody of one or both of the parents for more than half the year.

IRS Form 8332 or a similar statement can be used to release the claim of exemption for a child for the current year, specific future years or all future years. Your divorce decree, if specifically worded, can serve as an equivalent statement in lieu of Form 8332, and your ex-husband can use it to claim the dependency exemption. To serve as your release of the exemption for one of your children, your divorce decree or agreement must include all of the following information:

•The noncustodial parent can claim the child as a dependent without regard to any condition (such as payment of support).

•The other parent will not claim the child as a dependent.

•The years for which the claim is released.

Should we file joint or separate tax returns

Should we file joint or separate tax returns?

Warren R. Shiell, attorney at law

www.warrenrshiell.com

Should we file joint or separate returns?

You may only file a joint return if you are married at the end of the tax year (December 31) and both of you agree to file and sign a joint return.1 The box you check on your return is "Married filing jointly." Same sex couples and domestic partners cannot file joint returns. You qualify as married even if you are separated as long as there is no final decree terminating your marital status. A temporary pendente order does not affect your marital status. However, if the divorce is final and your marital status is terminated by the end of the tax year your filing status is either "single" or "Head of household."

There are pros and cons to filing a joint tax return which you should discuss with your tax advisor and your attorney. Generally, your tax burden will be lower although this will not always be the case depending on your respective incomes, deductions and credits. The main disadvantage of filing jointly is that both of you are jointly and severally liable for taxes on the return, including any tax deficiencies, interest and penalties. This exposure can be partially mitigated by executing a Tax Indemnification agreement discussed below. Also the IRS may allow relief to a spouse who files jointly. The three types of IRS relief ("innocent spouse," "separation of liability" and "equitable relief") are discussed in IRS publication 971.

My spouse said they would sign a joint return but they are now refusing to do so?

Spouses often use tax returns as a bargaining tool. Generally, a joint return can only be filed where both parties agree and both sign the return. 2. A court will not order unwilling spouses to file a joint return. 3. However, in rare circumstances the IRS will accept a joint return signed by only one spouse where there is evidence of a clear intent to file a joint return and the non-signing spouse does not file a separate return. 4.

Effect of filing status upon child and spousal support

In calculating guideline child and spousal support, the Court has to take into account "the annual net disposable income of each parent" which is computed by deducting from annual gross income, state and federal income tax liability after considering the appropriate filing status, all available exclusions, deductions, and credits. 5. Therefore, your filing status as "Married filing jointly," "Separate" or "Married filing separately" will have an impact on the amount of support you pay or receive. In one case, the California Court of Appeal overturned the trial court's decision where guideline support had been incorrectly based on husband's status as "Married filing jointly" instead of "Married filing separately." 6. If the parties calculate guideline child and spousal support using a certified program such as "Dissomaster" and incorrectly input that the parties will be filing jointly when the Husband payor should have been filing as "Married filing separately" and the Wife as "Head of household," the Husband may well end up paying less in child and spousal support because the program makes allowances for tax liability.

If we file a joint return what precautions should we take?

First, make sure that any tax refunds are paid to both of you. If you decide to have any refund sent to you by check make sure that the check is paid to both of you jointly. If a direct deposit is sought make sure the refund is routed to a joint account. You should reach a clear agreement as to how tax liability will be apportioned. A common approach is to prorate tax liability using a ratio based on both spouses separate incomes. Another approach could be based upon what each spouse would have paid if they had filed separate returns. Then to the extent a spouse's share exceeds what he or she has already paid by way of salary or withholding or estimated tax, that spouse would pay the difference.

Second, if you are going to file taxes jointly, it's a good idea to get your spouse to sign a Stipulation regarding Tax Indemnification since both spouses will be jointly and severally liable taxes on the return, including any tax deficiencies, interest and penalties. Even if the divorce (dissolution decree) states that one spouse will be liable for any amounts due on previously filed joint returns, the IRS may still hold both spouses jointly and severally liable and go after either spouse.

Example of a Tax Indemnification Agreement

IT IS HEREBY STIPULATED by Wife and Husband as follows:
1. Wife shall immediately provide the Husband with copies of all records and documents necessary for the preparation by Husband and his accountant of Joint Federal and State Tax Returns (“the Tax Returns”) for the year ending _____. Parties acknowledge that the Tax Returns will be prepared soley under Husband's direction and control.
2. Wife shall immediately respond to any reasonable requests for information from the Husband or his accountant in the preparation of the Tax Returns.
3. Wife shall sign the Tax Returns immediately upon presentation to her. Such signing does not constitute an admission by Wife as to the accuracy of the Tax Returns.
4. In the event that the parties shall receive a Federal or State tax refund, the _____ shall immediately endorse the full amount of the tax refund check to the ______.
5. The Husband agrees to release, indemnify and hold harmless the Wife from any Federal or State claims, fines, liabilities, penalties and assessments arising out of the filing of the _____ Tax Returns, with the exception of any unreported income to the Wife that she failed to provide to Husband and his accountant in preparing the Tax Returns.
6. The Husband shall pay all costs and fees of any administrative or judicial proceedings in connection with the filing of the Tax Returns.

Be warned. Even if you have a Tax Indemnification Agreement it may not help you if your spouse files for bankruptcy. If you have doubts about the accuracy of your spouse's, file separately.

If you are still married at the end of the tax year (December 31) but separated and your spouse will not file a joint return how should you file?

You must file either "Married filing separately" or as "Head of household" depending on your circumstances. Filing as "Head of household" has the following advantages:
• You can claim the standard deduction even if your spouse files a separate return and itemizes deductions.
• Your standard deduction is higher.
• Your tax rate may be lower.
• You may be able to claim additional credits such as the dependent care credit and earned income credit that you cannot claim if your status is "Married filing separately."
• There are higher limits for child care credit, retirement savings contributions credit, itemized deductions.

If you are still married by the end of the tax year you can file as "Head of household" if you satisfy the following requirements:

• You paid more than half the cost of maintaining your home for the tax year. Maintaining a home includes rent, mortgage, taxes, insurance on the home, utilities and food eaten in the home.
• Your spouse did not live with you for the last 6 months of the tax year.
• Your home was the main home of your child, step child or eligible foster child for more than half the year.
• You could claim a dependent exemption for the child.

The other non-custodial spouse must then file as "Married filing separately." Once you are divorced you may still file as "Head of household" if you paid more than half the cost of maintaining your home for the tax year and your children lived with you for more than half the tax year. There are different rules for filing as "Joint Custody of Head Household" and receiving a credit against California State taxes.7.

If one spouse files "Married filing separately" do we take the standard deduction or can we itemize deductions?

Consider this example. Bob who separated from Jackie but is still married at the end of 2005 decides to file "Married filing separately" in his 2005 taxes. He decides to itemize deductions which are considerable. Jackie his wife does not have large deductions and wants to take the standard deduction. The rule is that if Jackie qualifies as "Head of household" she can elect to take the standard deduction or itemize.8 If she does not qualify as "Head of household" and Bob itemizes she must also itemize even if she has limited deductions.9. This is true even if she files before Bob and claims a standard deduction. She will have to file an amended return when Bob claims itemized deductions.

When the parties file separately who gets the mortgage interest deduction and property tax deductions?

If the marital home is the separate property of one spouse they can claim the deductions. If the property is jointly owned, the spouse that actually pays the mortgage interest and property taxes is entitled to take the deductions. 10. Other expenses are deductible to the spouse to the extent that they are paid out of separate funds. If they are paid out of community funds each spouse can deduct one half of the interest and taxes.

Who can claim the dependency exemption and the Child Tax Credit and the Child Care Credit?

Generally, where the parties file separately it is the parent with whom the children have resided for the longest period of time during the tax year that can claim the dependency exemption and the Child Tax Credit ($1,000 for each child under 17).11. If the child lived with both parents for the same amount of time, the parent with the highest annual adjusted gross income gets to claim the child. It can therefore be important to keep a log of the actual amount of time the children spent with you. However, the non-custodial parent may take the exemption and the credit if the custodial parent signs an IRS Form 8332 "Release of Claim to Exemption of Divorced or Separated Parents" or a divorce decree or separation agreement releases the exemption and satisfies the wording of Form 8332. In California the court has the power to allocate the dependency deduction to the non-custodial parent. 12. It may do this to maximize support. The Child Tax credit can only be claimed by the parent who claims the dependency exemption. 13. Generally, whichever spouse is in the higher bracket should claim the exemption and compensate the other spouse for the shortfall.
The Child Care credit can only be claimed by the custodial parent if the other parent is not a member of the household for the last 6 months of the tax year. 14. Unlike the dependency exemption it cannot be traded although you may claim the credit even if the dependency exemption has been allocated to the other parent.

                                                                                                                        

1.  Generally see IRS Pub 504 "Divorced or Separated Individuals" at www.irs.gov
2. IRS Pub. 17, p.21. Available at www.irs.gov. 26 C.F.R. § 1.6013-1(a)(1)
3.  Marriage of Carlton & D'Allessandro (2001) 91 Cal. App. 4th 1213.
4. In Riportella v. Commissioner, TCM 1981-463, Tax court held that Mrs. Riportella's failure to sign a joint return was not fatal because she had signed joint returns for the previous two years, had signed a joint Form 4868 for an automatic extension, and had attempted to "sell" her signature for concessions in the divorce.
5. Fam. Code, § 4059
6. Marriage of Carlton && D'Allessandro, supra.
7. See www.ftb.ca.gov
8. I.R.C. 2(b)(c)
9. I.R.C.  63 (c)(6)(a)
10.  Rev. Rul. 71-268.
11. I.R.C. 152 (c)(4)(B)(i). IRS Pub. 501, p.12-13.
12. Monterey County v. Cornejo (1991) 53 Cal. App. 3d 1271.
13. IRC 24 (c)(1)(A).
14. IRC § 21(e)(4). IRS Pub. 503.

Tax treatment of Stock Options

Tax Treatment of Stock Options
Warren R. Shiell, Attorney At Law © 2006

The tax treatment of stock options in divorce depends to a large extent on whether the options are qualified or non-qualified stock options. Qualified stock options include incentive stock options (ISO's) that meet the requirements of IRC 422 and employee stock options (ESPP's) that meet the requirements of IRC 423. Qualified stock options generally receive more favorable tax treatment.

The benefit to the taxpayer of receiving qualified stock options is that they do not have to report the "price break" or "compensation element" as regular taxable income, although they may still have to make an adjustment for the Alternative Minimum Tax. The "compensation element" is the difference between the exercise price or "strike price" and the market price on the day when the options are exercised multiplied by the amount of options exercised. If the taxpayer then holds onto them for the statutory "qualifying period" - at least one year and one day after the date of purchase and two years after the original grant date - the taxpayer is only taxed on the gain at the capital gains rate of 15% of less - a lot lower than the regular income tax rate.

Contrast this with the treatment of non-qualified stock options. The taxpayer has to report the "compensation element" as taxable compensation in the year when the options are exercised which is then taxed at the regular income tax rate. The taxpayer is taxed again on any taxable gain when the shares are subsequently sold.

The following an example will illustrate the difference. The exercise price for the shares which are covered by the option is $25 per share. The taxpayer exercises 100 options to purchase shares at $45 per share. The "compensation element" is $2,000 (($45-$20) x 100). If these are qualified stock option's, the taxpayer wouldn’t have to report anything on his Schedule D (capital gains and losses) and his employer wouldn't include any compensation on his W2. He may still have to include the $2,000 on Form 6251 Alternative Minimum Tax. However, if these shares were non-qualified stock options, the employer would have to include the $2,000 in Box 1(wages) of the taxpayers W2 and he'd be taxed on it as ordinary income. In both cases, the taxpayer would again be liable for capital gains tax when he sold the shares. The amount of capital gains would depend on the amount of the gain and when the shares were sold.

In a divorce, it's important to consider the tax consequences of any transfers of stock options because the favorable tax treatment of qualifying stock options may be jeopardized. IRC 422 (b)(5) provides that an ISO cannot be transferred to or exercised by any person other that the employee to whom the option is granted, except upon death. This means that if, for example, ISO's are transferred to a spouse as part of a divorce settlement, the ISO's lose their qualified status and are treated as non-qualified stock options. It should be noted that the situation is different if, instead of transferring qualifying stock options, the employee transfers the stock that is acquired upon the exercise of the qualifying stock options. IRC 424 (c) (4) provides that a section 1041(a) transfer of such stock incident to a divorce is not a disqualifying disposition. The non-employee in only then liable for capital gains tax when the stock is sold.

The treatment of vested non-qualified stock options in a divorce is discussed in IRS Revenue rulings 2002-22 and 2004-60. These rulings first clarify that rule that an employee spouse is not required to include an amount in gross income when making a transfer of either qualified or non-qualified stock options to the non-employee spouse as part of the divorce settlement. It's only when the non-employee spouse exercises those options, that he or she will be required to pay income tax on any "compensation element". The rulings also make it clear that the same principles apply to transfers of any deferred compensation. A non-employee spouse must include distributions from a deferred compensation plan as income when received.

Going back to the above example, the non-employee spouse would be only taxable on $2,000 when they exercised the options. The non-employee spouse would have an additional taxable gain or loss when they subsequently sold the shares. There is, however, one important exception. Where non-qualified stock options are transferred pursuant to a divorce and the divorce order or agreement specifically provides that the employee spouse must report the gross income attributable, the IRS will treat the gross income as that of the transferor upon the exercise of the option.

Tax Issues in Divorce

Also see my post "Do we file joint tax returns?"

By Eva Rosenberg, MarketWatch
New York Daily News - http://www.nydailynews.com
Sunday, September 24th, 2006

LOS ANGELES (MarketWatch) - Despite a divorce agreement that specifically said neither party shall pay or receive alimony, one reader, Divorced in New York, was hit with a $5,000 tax bill from the Internal Revenue Service for some phantom alimony.
Even though the IRS had a copy of the divorce agreement in hand, the agency insisted on assessing the taxes. Why? Because this woman's ex-husband presented canceled checks to prove he made payments to her in the amount reported as alimony. The IRS didn't really care that it wasn't alimony.

What were the payments? They were her portion of his monthly pension, as granted to her in the divorce. Unfortunately, the state was sending the money to Divorced's ex-husband, with the withholding already pulled out, and he was sending to her half of the net. Then, on his tax return, the ex-husband was deducting his full payment as alimony, and pocketing her share of the refund.

This problem could have been avoided if the attorney had set up a QDRO, says Patricia Powell, a certified financial planner and chief executive of The Powell Financial Group Inc., in Martinsville, N.J.

What's a QDRO? A qualified domestic relations order. Properly prepared, it instructs the pension plan to issue a check directly to the ex-wife for her share of the income.

With a QDRO, an ex-spouse can decide whether to get a lump sum rolled over to her IRA, cash it out and pay taxes, or continue to get monthly payments. She can designate how much she chooses to have withheld from her check. And, getting credit for her full share of the withholding, if Divorced had reported the pension income properly on her own tax return, she would have owed no tax.

This is a typical error when couples indulge in do-it-yourself divorces, said Lynne Gold-Bikin, chair of the family law practice group at Wolf, Block, Schorr and Solis-Cohen LLP in Norristown, Penn. Even seemingly simple divorces are more complex than they appear. They involve knowledge of both divorce law and tax law. Gold-Bikin says that if you're not a tax-law expert, you should get one to review the divorce agreement and settlement.

If your divorce doesn't get a tax tune-up, what kinds of errors are apt to occur? Here are some common problems.

Deceptive equality Often, assets appear to be evenly split based on fair market value. Everything looks all nice and equitable, but one person just got stuck with all the taxable assets, while the other walked off tax-free, warns Powell. One of the biggest traps for women, especially mothers, is that they often give up their right to practically everything in order to keep the house and avoid moving their children.

Here are some tax rules to consider:

Pensions, 401(k)s and IRAs are taxed at ordinary income rates. With the high distribution added to your other income, this can throw you into the top tax bracket of 35%.

Stocks and investments often get long-term capital gain treatment - limited to 15%.

The house looks like a good deal with that $500,000 personal residence exclusion. But once your ex signs it over to you, you've instantly lost half that cushion. If the appreciation on your residence is substantially more than the $250,000 personal exclusion, Powell advises you sell the house while you're still married and can use the full $500,000 joint exclusion. Then, split the money and buy your own home in the same neighborhood, which will now have a higher tax basis (basis is the cost, for tax purposes). Note: In most states, property tax keeps up with the increasing market value of the home. In California, due to Proposition 13, property taxes are based on the original purchase price. Before you do this in California, run the numbers to see whether the increased annual property tax payments on the new home might cost you more than the potential capital gains tax.

Cash is valued at face-value for tax purposes - there is no tax on cash!

How can you avoid the problem of "deceptive equality"? Powell suggests you sell off the assets with the high tax values and split the cash. Or if that's impractical, balance the split based on the tax costs. Have your certified financial planner or tax professional review the assets' tax bases to help you reach a truly equitable split.

The vanishing alimony trick Alimony recapture can be a common problem, cautions Gold-Bikin.

IRS Publication 504 explains what the recapture is: "You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year."

Why is this recapture needed if the divorce agreement is properly drafted? Gold-Bikin said this often happens when the alimony payments aren't made on schedule. If several payments are missed in one year, then made up in another year, it's easy to see that $15,000 swing take place. Or if payments are stopped altogether and there haven't been three years of regular alimony payments, that would also trigger the recapture.

Why does this matter? Because the person paying the alimony will lose the deduction. And the person who received the money may go back and file amended returns for all the alimony years - and get refunds. Read that last sentence again if you're dealing with a deadbeat former spouse. You may have a refund coming!

How can you avoid this problem? Gold-Bikin recommends you adhere to the alimony payment schedule.

Vague assignments When the divorce decree awards family support without spelling out which part is for child support and which is for spousal support, it's all taxable to the recipient as alimony, and deductible to the payer, says Gold-Bikin. This the result of a 2005 Tax Court decision in Berry v. Commissioner.

How can you avoid this problem? Spell out how much of the support is designated for each child, and how much is spousal support.

Tax benefit tug-of-war One of Gold-Bikin's pet peeves is couples who fight over every smidgen of the tax benefits related to exemptions for their children, even when their income level causes them to lose those benefits.

Hope and Lifetime Learning Credits start to phase out for single or head-of-household filers when their adjusted gross income hits $45,000 and is eliminated entirely for those filers when AGI exceeds $55,000.

The deduction for student loan interest starts to phase out for single or HOH filers with adjusted gross income of $50,000, and is completely eliminated for those with AGI exceeding $65,000.

The child tax credit is lost when HOH income reaches $75,000.

Itemized deductions start to phase out at $150,500 for singles, HOH and married filing jointly

Personal exemptions phase out at incomes of $188,150 to $310,650 for HOH.

Landing in tax debtor's purgatory You probably know and pity many people who are stuck with divorce tax debt, and you wonder how they could have been so foolish, or trusting. They sign a joint tax return, even though they're getting divorced because they no longer trust each other. And they know better. But, "He promised to pay the whole tax!" is the usual refrain. Of course, he doesn't.

Powell says she's seen the most compelling and seductive behavior watching couples during divorce. The initiator of the divorce goes into courting mode, implying cooperation, an easy transition, or even a reconciliation - all the while, planning his/her wedding to someone else.

They effectively blindside their about-to-be ex into agreeing to practically anything, even to signing a joint tax return, when every fiber of their being is warning them away from this.

If you must sign that return, perhaps because it will reduce your own share of the tax liability, how can you best protect yourself?

Gold-Bikin says it's as easy as 1-2-3.

Get an indemnification letter as part of the divorce, making your ex responsible for his/her share of all taxes. And be sure that indemnification letter includes specific instructions for how any refunds are to be allocated. While IRS may not honor the agreement between the two of you, it does give you a basis to sue your ex, if you're ever stuck paying his or her share of the tax.

Don't ever sign a balance-due tax return without getting a certified check to pay your ex's share in full. Don't rely on promises from your ex or his/her attorney. They're rarely fulfilled.

If there is a refund coming, use IRS's new Form 8888 that allows you to have the refunds split up in any pre-determined allocation, and deposited directly to two different bank accounts.

Tune in, not out There are many, many more traps a divorcing couple can fall into. But, you're starting to get the idea. Even the simplest-seeming amicable divorce may have far-reaching financial implications.

Sweat the details, and don't just give up everything to get it all over with. You might think it's worth the price at the time because you're feeling emotionally out of control. Later, you'll realize just how badly you've been fleeced, and will spend years lamenting your decisions. If you can't face up to making the hard decisions, get a trusted family member or friend to work with you and your attorney, someone who can protect your interests.

Eva Rosenberg is the founder of TaxMama.com and an enrolled agent licensed to represent taxpayers before the IRS. She is the author of the new book "Small Business Taxes Made Easy." Reach her at taxwatch@gmail.com.