Tax Issues in Minnesota Divorce
- by Eric C. Nelson, Attorney

This article discusses some of the more common and important tax considerations in Minnesota divorce cases.

I. Taxes and Spousal Maintenance.

The default rule on income taxes and spousal maintenance is very simple: spousal maintenance is deductible “above-the-line” when determining a payor’s gross income for income tax purposes. [1] Spousal maintenance is taxable to the recipient as additional gross income. [2].

Parties may stipulate to change this by designating a spousal maintenance award as “non-taxable spousal maintenance,” but this rarely makes sense, because the aggregate tax savings is higher when the lower-income taxpayer pays the tax — and the spousal maintenance recipient is almost always the lower-income taxpayer, even after the receipt of spousal maintenance.


II.  Taxes and Child Support.
 
Child support is not treated as gross income to the recipient, and is not deductible by the payor. [3] In other words, the child support payor pays child support out of his after-tax income.  Parties have no power to change this rule, even by agreement.
 
III. Strategic Considerations.
 
Because spousal maintenance is taxable to the recipient and deductible by the payor, whereas child support is not, a common strategy in appropriate circumstances is to maximize aggregate tax savings by designating most of a support award as spousal maintenance rather than as child support.  For example, I recently had a case involving four children where we designated all $4,000 of the monthly support as spousal maintenance and reserved the issue of child support.  This was a win-win situation, because of the tax savings realized through the transfer of income from the higher-paid spouse to the lower-paid spouse.
 
Tip: if the recipient wishes to be paid through automatic income withholding, it makes sense to designate at least a nominal amount of the support as child support, in order to receive the full benefit of the public authority’s support collections services, which are otherwise very limited in spousal maintenance-only cases.  In cases involving both spousal maintenance and child support, the public authority provides full collections services for both forms of support.
 
IV. Income Tax Dependency Exemptions.
 
The default rule is that the custodial parent is the one entitled to claim the children as dependents for income tax purposes. [4]
 
The custodial parent is the parent who has custody for a greater portion of the calendar year. [5]
 
That said, parents may change this rule simply by having the custodial parent sign a waiver using I.R.S. Form 8332.  And the Court has the authority to allocate the income tax dependency exemption(s) to the non-custodial parent by ordering the custodial parent to execute this waiver. [6]
 
It is common for parties to simply agree to share the income tax dependency exemptions equally.  Courts often order this.  The governing standard is the “best interests of the children.”

V.  Filing Status: Married vs. Single vs. Head-of-Household.
 
Your tax filing status is determined as of the last day of the calendar year.  Therefore, if your divorce decree has not yet been “entered” by December 31st, then you must normally file as “married” for that tax year. [7] However, there is an exception for cases where parties file separate returns and have been living in separate households for the last six months of the tax year, and the taxpayer maintains this separate residence as the principal place of abode for a minor child for more than half of the year. [8] In this circumstance, a party is not considered married.
 
To file in a head-of-household status, the general rule is that — among other things — the taxpayer must be deemed “unmarried,” and  must provide the principal place of abode for at least one of the minor children for more than half of the year. [9]. It is NOT necessary to claim the income tax dependency exemption for the minor child in order to qualify for the head-of-household status. [10] Parties may NOT change this rule by agreement, nor may the Court change it by court order.  You MUST have at least one dependent in your care for more than half the year in order to file in a head-of-household status.