Many individuals negotiate and finalize their divorce without taking into account the tax impact of the decisions they are making. However, there are several tax traps that people could avoid while preparing to undergo divorce proceedings, which include their division of assets, their tax filing status, alimony, and child support.
One of the most hectic and stressful processes during divorce is the division of assets. However, instead of worrying about getting half of everything, there is something that individuals can do before they get divorced that would save them money. Before signing the divorce papers, the parties may transfer property tax-free using a property settlement agreement. Using a property settlement agreement, the ownership of major assets can either be signed over or the property can be sold and the proceeds can then be split amongst the parties.
Depending on an individual’s specific situation, certain filing statuses may be more beneficial than others. If an individual is legally divorced by December 31st, then he or she must file either as “single” or “head of household.” These statuses may also be used if parties have a legally binding separation agreement, or if the parties have lived apart for at least the last six months of the tax year. However, if the parties are still legally married as of December 31st and are still living together, then they must file as either “married filing jointly” or “married filing separately.” Generally individuals who file as either “head of household” and “married filing jointly” have lower taxes than those who file as “single” or “married filing separately.” So even though an individual may be going through divorce, he or she may still find it beneficial to file a joint tax return to save money.
Oftentimes, parties forget that alimony is considered taxable income for the recipient and an above-the-line tax deduction for the payer. It would be beneficial to the recipient of alimony to add his or her monthly alimony taxes into their monthly budget in order to understand how much alimony they really need.
While alimony can be considered in tax returns, child support payments cannot be included on the recipient’s tax return and they are not deductible to the payer. However, the payer of child support may remit the payments in the form of alimony in order to save money on taxes. Though the IRS allows this, any alimony that does resemble child support may not be fully deductible.
In an already costly process, these few tax tips may be able to help individuals save some money. While taxes may be the last thing on their mind, they should be prepared for these tax changes as soon as possible.
If you have any questions about taxes in the divorce process or any other issue, the Certified Family Law Specialists at Lonich Patton Erlich Policastri have decades of experience handling complex family law matters. Please contact the Certified Family Law Specialists at Lonich Patton Erlich Policastri for further information. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.