Don't Mess With Taxes

I really tried to ignore the Tiger Woods soap opera, but it just keeps getting weirder and sadder. Today we get reports of a fourth woman with whom the world's preeminent golfer allegedly was involved.

I don't really care about all the sordid affair details, but the apparent marital problems of Tiger and Elin did get me thinking about possible tax implications.

Yeah, I know. I'll never write a salable Lifetime Movie Network screenplay if the first thing that pops to my mind when discussing relationships is taxes. C'est la vie of a tax geek writer.

But since you're here, I'm presuming you also are at least a little interested in relationship taxes and not just taxing relationships, so here goes.

Divorce and taxes: None of the news, tabloid (print and TV) or Internet reports has so far mentioned divorce. And far be it from me to start yet more Tiger rumors.

Personally, I hope the couple can work through this They're young and they have two small children to consider.

But you gotta know that the D word has been mentioned by the respective lawyers for both Mr. and Mrs. Eldrick Woods from a "be prepared" standpoint.

While there was no doubt a pre-nup, there are very few iron-clad documents, especially when we're talking something as personal as a marriage. So that means if the Woods' marriage is dissolved, the pair and their aforementioned attorneys will have to come to some agreement on various payments.

And those arrangements will have tax implications.

Accounting for alimony: Help Youself Divorce says that under Florida law, which would apply since the Woods reside in Orlando, "In determining a proper award of alimony or maintenance, the court may consider adultery and other circumstances in their award."

Uh-oh, Tiger.

When an alimony amount is determined, how will it affect the taxes of both exes?

The recipient of spousal support must report that money as income on his or her tax return. The paying spouse, however, is able to deduct those alimony payments.

That means that all former spouses need to keep complete and accurate records to document payments and receipts. The IRS can track unreported amounts since, in order for the paying spouse to deduct the support, he or she must include the former spouse's Security number will be reported on the tax return.

What about the kids? Child support is never tax deductible by the paying parent. Neither does it count as income to the parent who receives the money on behalf of the children.

In addition to the child support, former spouses also need to work through the tax dependency issues. Each dependent claimed on a tax return provides the filing parent an exemption amount to help lower his or her tax bill.

The tax exemption for a dependent child usually goes to the parent with primary physical custody, regardless of how much child support the other parent pays. The custodial parent can, however, choose to let the other parent use the dependent exemption for tax purposes.

When a divorce is amicable, ex-spouses often "trade" the child dependency exemption from tax year to tax year so they can each periodically claim child-related tax breaks. And if a divorced couple has several kids, they also could choose to split the dependent exemptions.

Some other tax breaks, such as the child dependent care credit, also are limited to the parent who gets to claim the children as dependents.

But before surrendering a child's exemption and associated tax breaks, be it for one or many tax years, talk to your accountant,  as well as your tax and divorce attorneys.

Get the proper counsel: Notice the dual lawyer reference in that last paragraph? That's because divorce law and tax law are two separate animals.

The Tax Lawyer's Blog notes that some divorce attorneys don't pay enough attention to the tax consequences of the property settlements and alimony arrangements they negotiate for their clients.

Blog author and tax attorney Peter Pappas (who, by the way, has offices in both Tampa and Orlando if, Tiger and Elin, either of you is interested; just sayin') discusses four IRS forms with which divorce lawyers need to become very familiar.

In addition to child-related tax filings, the documents also cover situations where one spouse might not have been fully in the couple's tax loop and needs some relief from subsequent IRS actions.

I'll leave the details to Peter's post, but I will list them just so, in case you're in the midst of a legal break-up, you can point them out to your divorce attorney: Forms 2120, 8857, 8379.

Finally, I want to reiterate how tragic this whole Tiger situation is. A broken marriage is a terrible thing, both emotionally for the splitting couple and their families, as well as financially.

But if a divorce is the ultimate solution, then make sure you also take the tax implications into account, too.

Related posts:

• Jon and Kate plus 8 divorce tax tips
• Dealing with Divorce Dollars + Cents (austinwoman magazine)
• When love goes bad: Divorce and taxes
• For better or  ... apparently, just better

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