The Legal Issues 137
file jointly for another year, remember to delay the entry of the
divorce decree until after New Year’s Day. Of course, you can
always file separately, even when married. While you may save
taxes by filing jointly, remember that if both you and your spouse
sign a joint income tax return, each of you can be held responsible
for all the taxes due. Be especially careful regarding this joint tax
liability issue if your spouse is running their sole proprietorship
business income through your jointly filed personal income tax
returns or you could wind up incurring liability for any of his/
her business tax deficiencies as well.
Spouses and taxes. John Barrymore once said that you never
realize how short a month is until you pay alimony. If you pay
alimony, take consolation in the fact that it’s generally tax deduct-
ible. If you receive alimony, declare it and pay your income tax
on it.
Because alimony is tax-deductible, some spouses try to struc-
ture the pay off of what is really a property settlement through
alimony. A typical scenario involves a high-income/high-tax-
bracket spouse who wants to keep most of the tangible assets of
the marriage such as a house, cars, works of art, or other valu-
able objects. Strapped for cash to buy out the ex’s interest, this
spouse may offer to make payments over time. By characterizing
the payments as alimony, this spouse can use pretax dollars to
buy out the ex. At first this may seem unfair to the ex, who must
pay income tax on this property settlement disguised as alimony.
However, if the ex is likely to be in a lower tax bracket, a small
adjustment to the amount to be paid or the length of payments
may make this arrangement advantageous to both parties.
Kids and taxes. When parents divorce, one usually gets the
kids while the other gets a child-support obligation. Which par-
ent gets the dependency exemption? Unless there is language
in the divorce decree saying otherwise, the dependency exemp-
tion automatically goes to the custodial parent. This can add up
because tax law changes in 1997 created a new child tax credit of
$400 for each child under age seventeen for whom you can claim
a dependency exemption.
If you receive child support, it is nontaxable income. Don’t pay
taxes on it. If you pay child support, you should know that it is not