Divorce and taxes: Be aware of unforeseen costs

There are four primary tax burdens to be aware of before finalizing a divorce.

Going through a divorce is a complex process. Legal issues ranging from property division determinations to child custody arrangements can be contentious. Even if amicable, a number of legal issues can arise. Unfortunately, failing to carefully navigate each individual issue can lead to problems after the divorce is finalized. One example involves unforeseen tax consequences.

Some of the more common examples of tax consequences connected to a divorce include:

  • Property division: A recent publication in the Journal of Accountancy notes that this issue is particularly concerning for wealthy couples as property transfers that occur during divorce can be subject to income or gift taxes.
  • Alimony: The Internal Revenue Service (IRS) defines alimony as any payment that is received by a spouse under a divorce or separation instrument. The person receiving the payment is required to include the payment as gross income, meaning it is taxable. These payments are also generally deductible for the person making the payments.
  • Child support: In contrast, the IRS does not consider child support payments to be income. As a result, they are not taxed. These payments are also not deductible for the parent making the payments.
  • Designations: If children are present, the parents must come to an agreement over who will claim the child or children as dependents on tax returns. If the noncustodial parent claims this exemption, the custodial parent generally needs to file a form releasing the exemption to the other parent (Form 8332).

Depending on the details of the division agreement, one party to the divorce could end up with a much larger tax burden than the other. For example, one party could decide that he or she prefers to keep certain pieces of property in exchange for a larger alimony agreement. Although this may appear to be an equal trade proposal, the tax implications for the party receiving the alimony payment will likely be much higher. This agreement would likely result in a much lower tax burden for the proposing party.

Importance of legal counsel

These are just a few of the issues that can arise during and after a divorce proceeding. As a result, it is wise for those going through a divorce to seek the counsel of an experienced family lawyer. This legal professional will assist you in navigating these issues, advocating for your rights and working to better ensure a favorable outcome.