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.
at (732) 529-6937 to talk about your case.