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Separation, Divorce and Taxes
by Eva Sachs CFP CDFA
In the summer of 2008, Sandra and her husband Gerald, (not their real names) agreed that their marriage was over. Gerald moved out and has been living in an apartment since August 2008. They are still in the midst of working towards a separation agreement and finalizing their divorce.
Since tax time is right around the corner, it is important to understand a few basic things about separation, divorce and taxes. It is complicated and a topic most of us don’t warm up to.
Sandra may want to file her 2008 taxes differently than in previous years even though she and Gerald were not divorced by the end of 2008.
While divorce is the legal ending of a marriage, separation, for income tax purposes, is thought to take place when a couple in a married or common-law relationship has been living separate or apart for at least 90 days. In terms of being separated, there is no need, for income tax purposes, to have a legal separation agreement in place. The only thing necessary is to be living apart for at least 90 days.
If Sandra files her tax return this year, as “separated”, she may be now eligible for certain credits and deductions. A tax deduction reduces taxable income. A tax credit reduces the amount of income tax payable.
Sandra’s two children, Ben, age 10 & Sarah, age 12, have been living with her. As such, she is likely eligible to claim the eligible dependant amount tax credit.
Sandra may also be now entitled to receive the Child Tax benefit. This is a monthly payment made to parents of children who are under the age of 18. The parent must live with the child, must be the person who is primarily responsible for the care and upbringing of the child. As eligibility for the child tax benefit is based on family income, separation impacts both eligibility as well as who can receive the amount.
Sandra may now be eligible for other tax credits regarding medical expenses, child care expenses, tuition and education credits, just to name a few.
Gerald has been paying Sandra an amount monthly since moving out. Spousal support payments are tax deductible for the payor and must be included in the income of the recipient (regardless of the date of the agreement). Child support payments made pursuant to court orders or written agreements made after April 30, 1997 are not deductible for the payor or included in the income of the recipient.
What is considered a spousal support payment? The payments must follow a court order or written separation agreement. However, payments made before the agreement will constitute support if the agreement specifies that the prior payments are part of the agreement. Sandra should clarify what portion of Gerald’s current payment is for child support and which part, if any, may be for spousal support. The tax department requires payments be allocated first to child support and second to spousal support.
Lump sum settlement payments, including installments on account of a lump sum, are considered capital and therefore are not deductible or taxable in any circumstance
As you can see, there are a lot of things to consider whenever a relationship ends. It is important to be aware of the tax implications that may affect you whether your spouse has recently moved out or if you’ve finalized your separation agreement this year. If you have always filed your own taxes, this may be the year to get some expert advice. Have them explain the impact of your current situation. You don’t want any major surprises come tax time or anytime. You can’t avoid taxes but you do want to file smart.
This article is not legal, financial or tax advice. You should consult a lawyer or certified financial analyst or accountant if you have questions that relate to your specific situation. |
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