Claiming Loss After Divorce

[Terry D EA]

I have a situation where I am preparing the tax return for the wife in this somewhat nasty divorce. This couple divorced last year and no guidance was given regarding any tax filings or who gets to do what. My client inherited 100K from her mother's passing. My client's ex-husband invested this money with E-Trade and the account was opened in my client's name. The ex-husband lost 67,000 within days. When they were married, naturally they filed MFJ and the loss of 3K per year was claimed on the joint return. Last year they filed MFS with 1500 los on each return. Now, she is filing single and I feel the loss belongs to her. All 1099B's were in my client's name and SS#.  Ex-husband has stated he will claim their son who has not lived with him and does not meet all of the tests. He insists he will file HOH when he may be itemizing deductions. I don't care what the ex-husband does cause he is not my client. My interest is in doing the right thing for my client. Again, I feel the loss is hers totally and she is willing to let him claim the child. Opinions please.

[jklcpa]

If the investment account was titled in the wife's name only, and if the activity was coded properly in your tax program as belonging to the wife, the MFJ return would have had a $3000 loss and then the next year in MFS the wife would have used another $1500 of loss.  The now ex-husband shouldn't have been entitled to any of that loss on his return last year.  This year wife files as single and is back to the $3000 loss limitation. It is her account, has nothing to do with him except that she was foolish enough to allow him to lose a very large sum of her inheritance.

 

I think she should file appropriately, and if that means she is entitled to claim the son, then she should. If he files first then she would have to paper file, but you could try to e-file and see if it goes through.  Why is she willing to give away an exemption that you think is legitimately hers?  If you are satisfied that her documentation gives her the exemption, I think she should claim the child.  What am I missing?

[MsTabbyKats]

When I was preparing for the legendary RTRP exam...this came up in my studies.

 

It all goes to the person who owned the account.  Even if they were married...and she dies...he can't claim it.

[Terry D EA]

You both have confirmed my thoughts exactly. I did ask for the original 1099B when the loss originally occurred. Judy I can't tell you why she won't claim the son other than she is scared of her x. He does pay for his son's education and provides the health insurance for him which is part of the divorce decree as long as the son stays in school (college). The ex has agreed to give her the difference in cash between claiming her son and not. Simply put, she doesn't want to rock the boat. I have told her how he files and what he does is not my concern and should not affect her because she has the sole right to claim her son as well as the total 3000 loss. The return last year that was MFS was prepared exactly as Judy said. My main job now is to convince her she should file the way she is entitled to by law and forget what the scum bag says as everything I have seen proves he won't follow through with his promises. Gotta stay neutral here but I do get tired of seeing how others plain and simply screw others without  conscience.

[Cathy]

Terry,

 

Don't forget to tell her that even if she agreed to let the husband claim the child by completing Form 8332, she is still eligible to file HOH which normally gives her a better tax liability.  In fact, I would consider it my responsibility to not prepare her return using the filing status of Single, as HOH for the ex (which he is not eligible for) would more than likely produce a fraudulent tax liability for him.  I wouldn't prepare the return any other way for her as I would consider it an "aid and abetting" situation to create a false tax liability for her ex.  Her fear of the husband wouldn't relieve me of my responsibility to file an accurate return.

 

I'd prepare the return properly (claiming HOH and claiming her child) then duplicate it and change her filing status to Single (without her child) to show her the difference it would make in filing a false return and an accurate return. The difference in her refunds should help her to get over her fear of her husband.  Once you explain the situation to her, she might find that she would fear the IRS more than the husband and want to file her return accurately. 

 

Just food for thought......

[Pacun]

Be careful because while she can claim her child as a dependent based on the nights slept at her home, claiming HOH is a completely different ball game. Remember that education and health insurance (which is paid by ex) is considered when calculating HOH for her.

Since the child is in college, they both could count that time as temporary absence. Sometimes not rocking the boat is the best you can do for your client.

[Terry D EA]

Thanks Cathy and I have advised her that my responsibility is to prepare an accurate return for her. She still wants to give up the exemption and I have convinced her that she is entitle to take the entire loss of 3000.00. I got her to agree that moving forward it would be important for the IRS to see the declining loss total from year to year. My program would not allow me to enter a less loss value unless we were using MFS which we can't for obvious reasons. So, we will be filing HOH and claiming the 3000.00 loss. 

 

Pacun, the child has never lived with his father and spends no time there. As I said earlier, he is not my client and what he does or how he files is not my concern. I have to see who paid the education expenses. The 1098-T came in the son's name and no scholarships or grants were used. Yes, I know the 1098T form is always in the name of the student. I am really tired right now but am thinking the person who claims the dependency can claim the education credits. However, my client sent me the 1098T form and I don't know where or what direction this is going yet. I will look into this tomorrow.

Edited February 26, 2015 by Terry D