Divorce, IRS Style

As you might imagine, the intersection of divorce and taxes can be very confusing -- if not downright unpleasant. But whether you've divorced or separated, be it this year or last, there will be tax consequences that you need to be aware of. To that end, here's a roundup of some of the issues you may face this filing season.

Claiming the kids. Generally, whoever provides the bulk of the financial support can claim the children on the tax return. It doesn't matter how many months or days you provided the support, simply that your share of the support is more than 50%

There's a special test for divorced or legally separated parents, though. In this case, the "custodial parent" (simply, the one who had custody of the child for more than half the year) is treated as meeting the support test, even if the noncustodial parent actually paid most of the child's support. If the split is amicable and both partners are interested in maximizing the tax benefit, the custodial parent is able to sign a waiver on Form 8332, allowing the noncustodial parent to claim the exemption for the child. The waiver can apply to the current year only, or all future years.

Alimony and child support. Alimony is taxable, child support is not. Typical of the tax code, what's taxable to the recipient is deductible to the payer -- so if you're making an alimony payment, the amount is deductible to you and taxable to your ex. (Alimony payments are an above-the-line deduction, which means you don't need to itemize in order to claim it.) Child support, though, is neither deductible nor taxable.

Legal fees. You may know that some legal fees are deductible -- unfortunately, though, most fees arising from divorce cases are not. Legal expenses are deductible when they are a part of a lawsuit having to do with your business, your employment or an income-producing property. Legal fees for personal lawsuits are not deductible, unless you are awarded taxable damages. Since legal fees for tax advice are deductible, though, expenses for divorce-related tax planning may be deductible.