Divorce can be an emotionally draining process. If you are in the middle of one, you probably just want it to be over. But be careful. Divorce has serious tax implications, and the choices you make now may affect you for many years. Consider the following:
Alimony and child support. Alimony is tax-deductible if you pay it and taxable income if you receive it. Child support, on the other hand, is neither tax-deductible nor taxable as income.
Exemptions. If you are awarded physical custody of your child, you will usually be entitled to the tax benefits related to that child. Special rules may apply if you share custody. In addition to a $4,000 dependency tax deduction, tax benefits may include the dependent care credit, the child tax credit, the earned income credit, and education tax credits. You can transfer your right to claim your child to your former spouse each year, for tax purposes, by signing a special IRS form.
Retirement accounts and IRAs. Your former spouse may be awarded part of your retirement account or IRA. If your ex-spouse receives the benefits, he or she will generally be responsible for the taxes. But unless the accounts are divided and transferred in just the right way, you could end up paying the tax.
Property settlements. You are allowed to transfer property (house, cars, investments, etc.) to your ex-spouse without triggering income tax, if it’s part of your settlement agreement. But whoever ends up with your marital assets may owe taxes when the assets are sold. Take future taxes into consideration during your negotiations, or you might end up with large and unexpected tax liabilities.
Call us early in the divorce process, and let us help you and your attorney make informed choices.