You may not expect Uncle Sam to play a role in your divorce, but it is important to keep the Internal Revenue Service (IRS) in mind. This is particularly true when making the property division determination portion of the divorce.
Your divorce will have federal tax implications. Four specific consequences to keep in mind before signing the final divorce decree include:
- Child support
- Qualified Domestic Relations Orders
Having a basic understanding of the role these factors play in your finances can help you better ensure there are no financial surprises after the divorce is finalized.
Agree to pay or receive alimony? One party can benefit, another will pay.
In the eyes of the IRS, alimony is considered gross income to the spouse who receives payment. As such, the spouse making the payment cannot take an exemption for alimony payments. However, alimony payments can be deducted by the paying spouse.
What the IRS defines as alimony may be surprising. In many cases, payment to a life insurance policy and mortgage payments to a home may qualify.
Do not confuse alimony with child support.
Although alimony is deductible, child support is not. Keep this in mind during negotiations.
If children are present, discuss who gets the dependent break.
Child support is one of just many considerations if children are present. Parents should also discuss which parent will be able to claim the child or children as dependents. The IRS specifically states that only one person can claim each child as a qualifying child.
Generally, the custodial parent is the one to claim the child on tax returns. Certain protocol is available for a noncustodial parent to claim this deduction. Essentially, this requires that the divorce decree specifically state the noncustodial parent receives the right to claim the deduction or the custodial parent signs a declaration stating that the noncustodial parent can make the claim.
Do not forget to get a Qualified Domestic Relations Order.
Qualified Domestic Relations Orders (QDROs) are often required for certain retirement assets. Without this court order, retirement benefits may not be paid out to a nonparticipant such as an ex-spouse.
Just a few of many potential issues, highlighting the need for legal counsel.
These are just four of the many issues that can arise when going through a divorce. As a result, it is wise for those considering or who have recently filed for a divorce to seek the counsel of an experienced family law attorney. This legal professional will guide you through these and any other legal issues that may arise during the divorce.