Taxes: Consider the Tax Implications of Support when You Get Divorced
Making the decision to divorce is a difficult emotional process. Sometimes you may not be sure that divorce is the right thing to do, yet at other times you may wish it was already over. What could add to the anxiety of divorce? Taxes. Divorce may not be as inevitable as taxes, but it certainly complicates the issue and vice versa. Here are tips for how to approach some of the tax issues in divorce.
1. Consider the tax implications of support.
Child support is not deductible, and alimony is. Calling child support family support makes it fully taxable to the recipient and deductible to the payer, just like alimony. Do not characterize the payments as family support unless you will end up with more money after taxes are paid.
2. Specify in your divorce decree who will claim the children as exemptions.
On your tax returns, the exemption for your kids goes to the custodial parent, unless you specify otherwise in the divorce decree. If you have joint custody, the exemption goes to the parent who has the child the greatest number of days. If you are entitled to claim the children on your return, but your ex threatens to claim them instead, file early in the year. If you’ve already claimed the children, the IRS will make your ex prove he or she was entitled to the exemption.
3. Keep track of legal fees during your divorce.
Fees paid for advice concerning the tax consequences of your divorce can be taken as an itemized deduction. Other fees, such as the cost of preparing a new title for your rental property, can be added to the tax basis of your assets. Fees you incur to obtain alimony are deductible in the year you pay them.
4. Take taxes into account when you divide property.
Money in retirement accounts generally is worth less than money in bank accounts, since the retirement money will be taxable when withdrawn. Reduce the value of such accounts by the taxes you eventually will pay to see if you are receiving a fair share. The same is true for highly appreciated assets or depreciated rental property that will have large taxable gains when sold.
If you need more time to decide tax issues, apply for an automatic six-month extension to file your tax return. If your divorce involves complicated financial and tax issues, such as separate property, stock options or pension or business valuation, a knowledgeable accountant or a Certified Divorce Financial Analyst can help you.
