Division of Earned Income at Divorce

Before finalizing your divorce settlement, make sure you check the terms with your CPA or other tax professional.  While your attorney will help you with legal advice, few lawyers are also tax specialists.  Therefore it is important that both you and your lawyer get some outside help.  Before finalizing your divorce decree or marital settlement agreement, have a tax professional review the terms to insure that the actual tax consequences of your settlement are the same as the contemplated tax consequences written in your agreement.

The Internal Revenue Service ("IRS") will follow the Internal Revenue Code ("IRC"), not your divorce decree in making decision about your tax liability.  Therefore, it is important that you make sure the terms of your decree follow the code rather than contradict its terms.

For instance, prior to the divorce being finalized, it is generally more costly to file to as married filing separately, than to file a joint return.  However, in the event you have decided to file separately, care must be taken to determine which of the parties will claim which income and deductions.  Keep in mind that until the "community" (meaning your marriage) ends, earned income is reportable 50/50 between the spouses.  Self-employment tax however will be assessed personally without regard to community property laws. 

Income from any community property asset should also be awarded 50/50 until the asset is awarded to one of the spouses, so if the parties have income producing assets such as an interest bearing monetary account, a rental property, or business, both spouses will be responsible to pay taxes on 50% of the income even if they do not have control of the asset while the divorce action is pending.  Consequently it can be important to state not only the asset distribution, but the date of division of the assets for tax reporting purposes. 

Before having your accountant claim only 50% of the earned income however, it is important to discuss your strategy with your divorce attorney.  For instance, if you are claiming that you have a separate property interest in an asset or in certain income, it is important that your tax reporting be consistent with your legal theory of the case.  For instance, if you are claiming that your business in separate property, rather than community property then you need to claim 100% of that income  in order to have your tax history mirror your theory of the case.