What Tax Implications Have You Overlooked in Your Divorce?

We have all heard the old adage that only two things are certain: Death and taxes. Unfortunately, divorce does nothing to change either of these certainties. In fact, when divorcing, it is very important that you pay attention to your financial future, including the tax implications of your decisions. In the chaos and uncertainty of divorce, it can sometimes be simple to overlook those long-term financial ramifications that can result from taxes. There are a few implications that you need to keep in your mind when crafting a strategy for your divorce or considering a possible settlement offer.

If you have children, the federal tax implications of child support should be uppermost in your mind. Child support is not tax deductible to the paying parent. Moreover, it is not taxable income to the receiving parent. Another essential tax consideration if you have children is the federal child tax deduction. In many cases, the divorced parents will alternate years on who claims the children, or if there are multiple children, they may divide up who will claim which child every year. In order to complete this process, the custodial parent will need to provide Form 8332 to the non-custodial parent to attach to his or her return.

Spousal support, however, is not the same. Spousal support is deductible from the income of the paying spouse. Moreover, it is taxable as gross income to the receiving spouse. In some cases, the parties may choose to label support payments as “family support” or “unallocated support.” This can have big tax consequences for both parties, depending on how the support order is drafted. For example, if the payments end on the death of the receiving spouse, it could be ruled by a tax court to be spousal support. However, if the payments are dependent on a child’s age, it could be ruled to be child support.

Exchanging property is also an important consideration. Tax code 1041 provides for tax-free exchange between spouses. In other words, spouses may freely transfer property between themselves during a marriage without tax consequences. This includes exchanges that happen as part of a divorce proceeding. This would allow parties to avoid a capital gains tax if the transfer is part of the divorce. This is slightly different than the fact that dividing retirement account during a divorce, if done properly, can avoid a triggering event that would have otherwise required paying taxes on the division or cashing out of the account.

Divorce can have many implications for your financial future, including in the area of taxes. We have experience in helping our clients successfully navigate this area of the law and building a positive financial future. Contact us today at (732) 529-6937 to talk about your case.

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