Divorce is an issue that has serious tax implications for both parties. A divorce can be a fairly simple matter but it could also be complicated. More often than not, divorce involves more than facts and figures. Having legal and tax regulations can be most helpful in such a situation. Some of the issues that come up are alimony, rules of injured/innocent spouse and property settlements.

The party who pays alimony deducts it as an adjustment to income. This means the person paying is not expected to itemize deductions. The recipient of alimony is taxed. Alimony is a payment from one spouse to another due to a legal separation or divorce. This payment is not voluntary, not property settlements and not child support. The two spouses may not live in the same home, payments must be cash and when the recipient dies the payment of alimony ceases.

Certain debt like student loans and child support tax refunds can be trimmed as payment for back taxes. If the IRS does this to a spouse the other is the injured spouse. The injured spouse has the right to claim his or her share from the IRS. This spouse is under the impression the other spouse is liable for taking care of joint federal tax. A spouse who deliberately doesn’t declare income/overstated expenses is guilty.

Property transfers from one spouse to the other. The one who transfers is the indicator of the adjusted basis. A transfer that took place prior to 19 July 1984 has the basis of fair market value when transfer took place. No gift tax implications exist for transferring property unless in extraordinary situations. Payments resulting from recognized retirement plans and child support fall under a qualified domestic relations order. Benefits paid to a child or ex-spouse is taxed to the adult recipient but IRA transfer is gratis.

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The long tradition of Swiss banks to protect the identity and privacy of clients at any cost buckled under the weighty gaze of Uncle Sam. The banks made the decision to release the names of at least four thousand five hundred account holders to the IRS. The release of details of secret accounts results in the payment of hefty tax bills by account holders. However, it is not the payment of those bills that could be the means of account holders avoiding jail. Those who find themselves in such a predicament always want to know if they should pay the tax bills or keep a low profile or apply for amnesty. The IRS became aware of well heeled Americans using methods that allowed them to keep foreign bank accounts secret from Uncle Sam. Whether in Switzerland or other offshore accounts the purpose is always the same – to avoid paying tax. This is done by not reporting income from the accounts when filling in income tax returns. Withholding information from the IRS is deliberate. It is compulsory to report dividends or interest. Uncle Sam makes it very easy to disclose information by providing a simple check box on each form. UBS is an example of an institution responsible for allowing Americans to cover their tax tracks. Uncle Sam sued UBS and is receiving $780 million in settlement. The IRS won’t stop till it gets what it wants. Part of Uncle Sam’s strategy to get what he deserves is amnesty. It allows tax evaders to come forward without a penalty. For example, with amnesty – if a $1 million account does not reveal yearly earnings of $50,000 over six years the back pay to IRS is $386,000. Without amnesty – the IRS will take $2.3 million with extra interest and worst of all such an account holder will spend time in jail. When it comes to tax evasion there are no more secrets. If you lie low you are taking an enormous risk. In order for an offshore tax evader to come clean it is advisable to accept an offer of amnesty, pay the amnesty tax bill and thereby not spend time in jail.

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Approximately half of Americans eligible for paying federal income tax in 2009 – did not. According to the Tax Policy Center, 55% of families with children and 47% of tax payers in 2009 did not contribute a single dime to federal individual income tax. The majority of those who didn’t pay income tax did contribute to other federal taxes, social security, Medicare and state taxes.

To decide whether this situation is unfair you must understand income tax. Income tax has a dual purpose. It is responsible for bringing in almost 55% of federal revenues. Its second purpose is to give incentives, credits, exemptions and deductions to individuals who exhibit behavior regarded as favorable to government. Approximately 3/4 of all citizens contribute taxes that increase revenue. Its due to social welfare that the majority of people disappear from tax rolls.

Examples of Congress-backed uses of income tax as subsidies are: tax saving retirement plans, child care with credit, college attendance with credits and earned income credit. Deductions itemized have been kept i.e. charitable giving; subsidized home ownership; local government and state government. It’s possible for government to provide these rewards by means of spending programs. Such programs would ensure many more citizens contribute to income tax.

Social security, tax exempt interest and pension income are the main income tax exclusions. It’s estimated by TPC if dependent deductions and credits were added to main exclusions, 80% of singles and families would be liable for payment of tax. Furthermore, 90% of citizens who wouldn’t contribute earn less than $20,000. On the other hand, if the main tax grants were eliminated, 98% of citizens earning more than $20,000 would contribute. The number not paying tax decreases even further if payroll taxes are incorporated.

Don’t blame the levy’s tax role for 50% of Americans not contributing to federal income tax. This is brought on by Congress making use of the system to hand out social benefits.

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