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Tax Issues in Divorce

Tax Issues in Divorce

The emotional distresses of divorce can be very taxing and it can be very easy to get wrapped in. Apart from the emotional impact, it is also important to understand that a divorce can have a substantial financial impact. It is recommended to seek divorce legal advice from an experienced divorce and family law attorney and professional tax advice from a CPA to find out how to best handle any financial issues that might arise during the division of assets or as a result of paying / receiving alimony or child support. Some of the most prominent issues occur during the custody arrangements, child support or alimony, or the property division. It is good to remember that divorce will also affect your tax return and how you file it.

Division of Marital Assets

There are no immediate tax consequences should the members of the divorcing party agree to a property settlement. But if the time to sell the property come, it is possible someone in the divorce party could find a very unpleasant tax surprise. The reason is because each member of the party receives the property on its original tax basis, and a low tax basis may trigger a sizable capital gain. A truly stable property settlement should consider more that the current market value, like the tax basis of assets.  In summary, the division of marital assets pursuant to a divorce decree usually do not present a significant tax issue.  However, the changing value of an asset and the timing of the transfer of property could make a significant difference in a possible tax liability.

Custody Arrangements

In the interest of taxes, physical custody is the arrangement that principally matters for the reason that federal law gives several credits and deductions depending on where a child lives during the tax year. There is also the possibility of shared or joint physical custody but that rarely works out to an equal division of time between parents, the issue is that even if the divorce decree or custody order shows that you have shared physical custody, this might not register with the Internal Revenue Service and could possibly not earn you a tax break.

Child Support

Divorce Attorneys Family Lawyers Cumming GeorgiaChild support is considered deductible for federal income tax purposes, meaning neither the parent paying nor the receiving parent and child owe any taxes on it. However, unlike spousal support, child support payments made are not deductible by the parent who makes the payments. Either parent may be eligible to receive a dependency exemption per child. The parent who receives the exemption depends on what arrangements the parents agree to or what the court decrees.

Because Child Support payments not tax deductible to the payer, we often recommend that the payer try to negotiate lower child support amounts and higher alimony in its place (since alimony is tax deductible to the payer).  However, the receiver of child support would usually not want to receive taxable alimony in its place, except that alimony can be easily agreed to be non-modifiable and can extend past the adulthood of any minor children.

If the paying parent is having difficulty making payments, they should seek a way to modify the support order immediately as missed payments can be garnished from tax refunds.

Alimony

Alimony is a word used for tax deduction purposes even though it is sometimes commonly referred to as spousal support or maintenance in most states. If you are the one making alimony payments then it is possible to deduct those spousal support payments from your gross income when the time comes to file your taxes. If you are the one that is receiving the maintenance payments then they must be counted as part of your gross income when filing taxes. Spousal payments can not count as alimony for tax purposes if the two members of the party are divorced or legally separated but still living under the same in the same household.

If negotiating a divorce and you are considering paying alimony, you will want to consider the tax beneifits of paying alimony versus paying additional child support or deciding to give up more in marital assets.

More Information regarding alimony and income tax from the IRS >>>

Filing Taxes after Divorce

Filing your taxes after divorce starts with determining your filing status. If you are considered legally divorced before or on the last day of the calendar year you are eligible to file as single or head of household. It is also possible to claim either one of these statuses if you are not fully divorced but you have a legally binding separation agreement or if you and your spouse have lived in separate households for at least the last 6 months of the calendar tax year. If you were not fully divorced and you filed taxes jointly, it is recommend to communicate with your soon to be ex-spouse on the best way to divide the tax return.

If you are facing divorce and have questiosn regarding the tax implications, call us at 770-609-1247 to speak with an experienced divorce attorney in the Cumming Georgia area.

Updated: 2017-06-05

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