Head of Household Requirements – 2013

November 26, 2013

taxesThere is no getting around the fact that divorce triggers lots of tax questions.  One of most befuddling of those new tax dilemmas for divorcing couples is the availability of the Head of Household filing status.  To clear up some of the mystery, here is some up-to-date information to help you decide what you should be negotiating for in your divorce settlement:

You can only claim Head of Household if:

You are unmarried or considered unmarried (see below under “Terms”) on the last day of the year,

  • You have paid more than half the cost of keeping a home for the year,** and
  • One or more qualifying persons lived with you in the home for more than half the year.

There are two exceptions to the residency requirement for temporary absences and for dependent parents:

Temporary Absences: During the period of temporary absences due to “illness, education, business, vacation, or military service,” the taxpayer and the qualifying person are still considered to be residing in the same household. To count as a temporary absence, “It must be reasonable to assume the absent person will return to the home after the temporary absence.  You must continue to keep up the home during the absence.” (IRS Publication 501)

  • Dependent Parent(s):  A parent can be a qualifying person even if the parent does not reside at the same home as the taxpayer.  The taxpayer must pay more than half the cost of keeping a home that was the main home for parent(s). (IRS Publication 501)

TERMS:

Unmarried: Taxpayer is legally separated (no such thing in Virginia), a decree of divorce/final order of divorce or a decree of separate maintenance has been issued by the court [IRS Code §7703(a)].

Considered Unmarried: A taxpayer may be “considered unmarried” for the purpose of qualifying for Head of Household tax status if:

  • he or she has a child, stepchild or foster-child residing at his/her home for more than half of the year for which he or she is entitled to a deduction (pursuant to IRS Code §151, 152) (even if deduction is given away with IRS Form 8332) [IRS Code §7703(b)(1)]
  • he or she provides for more than half the cost of maintaining a home for him/herself [IRS Code §7703(b)(2)], and
  • he or she is legally married, but has lived in a separate residence from spouse for the last six months of the year (July-December) [IRS Code §7703(b)(3)]

Deductions: A married person who files as Head of Household may choose either the standard deduction or itemized deductions (regardless of which method is used by the other spouse, if still married, which is the opposite of how the IRS does things when spouses file as “married filing separately” (where the two spouse’s choice of standard of itemized deductions must match).   (IRS Publications 501 & 504)

  COMPARISONS:

 Standard Deductions:

Single or Married Filing Separately: $5,950

Married Filing Jointly (or Qualifying Widow with Child): $11,900

Head of Household: $8,700

Tax Basis Comparisons

$30,000 Gross Income

Single 15%      HH 15%

$40,000 Gross Income

Single 25%      HH 15%

$50,000 Gross Income

Single 25%      HH 25%

$60,000 Gross Income

Single 25%      HH 25%

$70,000 Gross Income

Single 25%      HH 25%

$80,000 Gross Income

Single 25%      HH 25%

$90,000 Gross Income

Single 28%      HH 25%

$100,000 Gross Income

Single 28%      HH 25%

$125,000 Gross Income

Single 28%      HH 25%

$150,000 Gross Income

Single 28%      HH 28%

 

Posted by Elizabeth Downing Revell, Mediation Assistant and Robin Graine, JD, Virginia Supreme Court Certified Mediator

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.

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Alimony Recapture Rule

April 16, 2013
Tug o' war

Tug o’ war

“Alimony Recapture” is a tricky and often misunderstood IRS rule (Internal Revenue Code (IRC) §71) that is designed to prevent front loading of alimony payments which, the IRS presumes, are actually a property distribution “disguised” as alimony to save on taxes due. Of course, not everyone who is vulnerable to the recapture rule is trying to disguise a distribution of property as alimony, but the rule is supposed to be applied uniformly, regardless of motivation.

Alimony Recapture applies, in certain cases, where there is an award of alimony[1] from one ex-spouse to the other ex-spouse, that decreases in amount during the first three post separation years[2].  “Recapture” refers to the IRS’s right to force the payer of alimony to pay back, to the IRS, all tax benefits received as a result of alimony payments made to his or her former spouse during those first three years.  (After the third full year, the concept of recapture becomes irrelevant.)

This would be, for many ex-spouses, a tax tragedy.  Recapture aside, alimony is a very generous tax deduction that is almost always of primary importance when negotiating a divorce settlement wherein support of an ex-spouse is appropriate and feasible.  Specifically, 100% of the alimony paid is allowed to be deducted from the payer’s gross income, thereby reducing his adjusted gross (taxable) income, dollar-for-dollar, in the amount of the alimony paid for that year. The ex-spouse who receives alimony, however, must pay taxes (also dollar for dollar) on those alimony payments received.

The rules of recapture are not overly complicated.  They are, however, like so many IRS promulgated dictums, befuddling for most people because they are written in such a convoluted manner and sound, pretty much, like gobbledygook. In a nutshell, the tax benefits of paying alimony will be recaptured by the IRS if, in the 3rd year after your alimony payments commence, you pay greater than $15,000 less in alimony than you paid in the 2nd year. Or, if, during the 2nd and 3rd years, you pay  “significantly less” in alimony than you paid in the 1st year. The term “significantly less” is the IRS’s word, not mine, and it is not defined in the statute.  Luckily, the IRS has provided a recapture worksheet that makes trying to figure out what they mean by “significant” a nullity.  In other words, if you run your numbers through the worksheet and they show that you fall under the recapture rule, you do.  Period.  (“Significant” of not!)

The worksheet and further explanation of the recapture rule can be found in IRS Publication 504 Divorced and Separated IndividualsThat publication forth a nice example that most people find helpful when trying to understand the concept of recapture.  Below is the IRS’s example and their worksheet, straight from Pub 504:

IRS Example: You pay your former spouse $50,000 alimony the first year, $39,000 the second year, and $28,000 the third year. Using these numbers, you report $1,500 as income on your Individual Income Tax Return (Form 1040, line 11). Your former spouse, on the other hand, reports on her Income Tax Return (Form 1040 line 31a), a $1,500 deduction. See worksheet, below:

Worksheet 1. Recapture of Alimony—Illustrated

Note. Do not enter less than -0- on any line.

1.

Alimony paid in 2nd year

1.

$39,000

2.

Alimony paid in 3rd year

2.

28,000

3.

Floor

3.

$15,000

4.

Add lines 2 and 3

4.

43,000

5.

Subtract line 4 from line 1

5.

-0-

6.

Alimony paid in 1st year

6.

50,000

7.

Adjusted alimony paid in 2nd year
(line 1 minus line 5)

7.

39,000

8.

Alimony paid in 3rd year

8.

28,000

9.

Add lines 7 and 8

9.

67,000

10.

Divide line 9 by 2

10.

33,500

11.

Floor

11.

$15,000

12.

Add lines 10 and 11

12.

48,500

13.

Subtract line 12 from line 6

13.

1,500

14.

Recaptured alimony. Add lines 5 and 13

*14.

1,500

* If you deducted alimony paid, report this amount as income on Form 1040, line 11.
If you reported alimony received, deduct this amount on Form 1040, line 31a.

So, what facts and circumstances usully exactly triggers the IRS’s Alimony Recapture rule? Typically, it is triggered by a reduction or termination of alimony payments caused by one or more of the following:

  1. a.    A lump sump payment scenario;
  2. b.    A settlement agreement/divorce decree in which alimony payments are decreased over that first three year post separation period;
  3. c.    A settlement agreement/divorce decree that allows for alimony payments to cease prior to the end of the first three years post separation;
  4. d.    A change made to your separation or divorce agreement, by the court or by agreement, due to the recipient’s decreased need, or the payer’s decreased ability to pay, that ignores the recapture rule; or
  5. e.    The payer’s failure to make alimony payments on time, or at all.

You will note that, even if you do everything “right”, for purposes of legal enforceability (i.e., you consult an attorney, who puts the agreed-upon changes in writing, and you execute the document with the same formality as the original agreement, etc.), you still cannot assume that you will be free from the punishing effects of the Alimony Recapture Rule. It’s the old “knew or should have known” scenario.

Are there exceptions?  Yes.  There is no Alimony Recapture if:

  • you made alimony payments over the three year post- separation period that varied because they were a fixed part of your income from a business, property, employment-compensation, or self-employment compensation[3]; or
  • your alimony payments decreased as a result of your ex-spouse’s death; or
  • because the spouse receiving alimony got remarried before the end of the 3rd year post separation period.

 

Caveat: There are rare cases when a party might still be better off working to get his or her alimony payments reduced and taking the lumps from the IRS in terms of recapture.  Such a decision will depend on your individual financial circumstances. Run the numbers, do the worksheet, and talk with you CPA and divorce attorney before making such a decision.

Posted by Robin Graine, JD, Virginia Supreme Court Certified Mediator

This blog and its materials have been prepared by Graine Mediation for informational purposes only and are not intended to be, are not, and should not be regarded as, legal advice.  This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.  Internet subscribers and online readers should not act upon this information without seeking professional counsel.


[1] The Virginia Divorce Code refers to alimony as “spousal support”.  For this article, however, I will be referring to monetary support payments (that are not child support), from one ex spouse to the other, as “alimony” because that is the term used by the IRS.

[2] The three-year period, in which the payer is vulnerable to the recapture rule, begins the first calendar year during which he or she makes an alimony payment under a divorce decree, order for separate maintenance, or written and signed separation agreement, as long as all the other criteria for alimony are met. The 2nd and 3rd years are the next two calendar years, whether or not any payments are made during those years.  Please know that alimony payments made under a temporary support order do not count as part of the 3 years for purposes of alimony recapture.

[3] Alimony payments are sometimes set to correlate with a party’s business earnings, rents received, etc. such as in a case where the parties agree that the former spouse will receive X% of the payer’s gross or net profits from his or her business/real estate income earned for a set period of time post divorce. 


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