Lemon, I think pretty much anything is up for grabs as a bargaining chip when you are making your property settlement. For example, right now my husband and I are beginning discussions of our property settlement. If we are divorced before the end of the year and file separately, we would save thousands of dollars. That is a lot of money to me, as my own income is fairly low. However, my husband wants to buy a house before we file for divorce, and that will push our final divorce date into 2008. But since this is a big advantage to him, he is willing to compensate me for half of the thousands we would lose, since I agreed to hold off on filing. Most everything can be negotiated.

In my state, which is a community property state, I believe there is some formula for splitting the taxable income, tax liability, and deductions (such as mortgage interest), based on the date of separation. For example, if he makes $60,000 taxable income a year, and she makes $40,000 a year, and they separate 6 months into the tax year, then her taxable income is considered to be 1/2($30,000 + $20,000) + $20,000 = $45,000 for the year. For him, it would be 1/2($30,000 + $20,000) + $30,000 = $55,000 for the year. Other calculations are made for the tax liability. I would advise checking with a CPA who is very knowledgable about divorces.

Lemon, what is the IRS publication on divorce? Does it have a number? I would like to get that.