Based on questions from our readers, we continue to share with you some common taxation mistakes that you should avoid when you divorce:

DON’T TRY TO DISGUISE CHILD SUPPORT AS ALIMONY: Sometime divorcing parents get the brilliant idea that if what is really “child support” is called “alimony,” the paying parent in the higher tax bracket will be able to deduct the otherwise non-deductible payments. However, should these payments terminate or reduce on a date that is at or near a "child-related event" – like a child graduating from high school, attaining age 18, dying, getting married, or leaving school – they won’t fool the IRS which will treat the payments as child support, no matter what they are called. So, if what is called “alimony” reduces or ends within a few months after a “child-related event,” you can bet the payments will be presumed to be child support.

Remember: If payments are really intended to be alimony, the agreement should contain language that the paying spouse will deduct them, the receiving spouse will report them as income, and the spouses will indemnify each other for discrepancies that may arise should the taxing authorities treat the payment otherwise.

ALIMONY PAYMENTS MUST END THE RECEIVING SPOUSE’S DEATH: Otherwise, a stream of alimony payments will be treated as being a non-deductible property settlement. In other words, should a husband and wife agree to a lump sum alimony payment of $24,000.00 but, because Wife is not employed, in order to get the deduction, Husband agrees to pay her $2,000.00 per month as taxable alimony for 12 months. Unless the payments terminate by state law or the agreement doesn't say that the payments will terminate earlier than 12 months should Wife die, the IRS could refuse to allow Husband’s deduction and treat the payments as non-deductible property settlement.

ALIMONY PAYMENTS CAN’T STOP OR BE REDUCED TOO QUICKLY: Should alimony payments terminate or be reduced too quickly during the first three years of payments, it is most likely that the IRS will treat some of the payments made as being part of a property settlement which is neither deductible to the paying spouse nor taxable to the receiving spouse. This will result in what is called a "recapture" of part of the payments – that is, the paying spouse will recapture and pay taxes on amounts previously deducted, and the payee will get a corresponding deduction.

Because of space limitations here, we are not able to provide a “recapture” example, so be sure to ask your lawyer so you understand.

THINK SEVERAL TIMES ABOUT FILING A JOINT RETURNS: Unless the situation is very straight forward – that is, both spouses receive W-2 wages – signing joint tax returns while waiting for a divorce can be dangerous because the taxing authorities look at both spouses as being liable for all taxes owed, not to mention interest and penalties. Therefore, should one spouse not report all income or improperly deduct expanse or not pay what is due, the other spouse signing the tax return is responsible for the total liability.

Should joint returns be filed for whatever reason during the divorce process, each should indemnify the other for taxes, interest, and penalties, not to mention the cost of an audit should something go haywire. But remember: This agreement is not binding on the taxing authorities and will be of no benefit should the indemnifying spouse be unable to pay. For this reason, agreements should contain provisions that the indemnification is intended as an incident of support so there will be at least some chance it will not be discharged in bankruptcy.

Next Week: The final “Tax Tips” Installment.