Don’t Forget to Factor Tax Considerations into Divorce

The tax code is a bloated tangle of inscrutable rules and regulations that is Greek to even some of the most highly trained professionals. That being the case, no one expects you to have a fully developed grasp of every way in which a divorce will affect your tax liability. But even without a complete understanding of the tax code, a basic overview of taxes in divorce can give you a better idea of what to expect when tax time comes in April.

In property division, you generally do not owe taxes on anything you receive; after all, it’s not income, you already own it. However, you must be wary of hidden tax liabilities in certain assets.

For example, if you receive a piece of real estate in the property division agreement that has increased in value substantially over time, you might have to pay capital gains tax on the profits you realize through the increase in value when you sell the real estate. This type of asset is the last thing you want to get stuck with when it is time for IRS tax collection.

Alimony, otherwise known as spousal support, is simple: alimony payments are deductible by the payer, and count as income for the recipient. Child support, on the other hand, is neither tax deductible nor treated as income. Even so, child custody arrangements could have tax implications; depending on the situation, either or both parents may be able to claim a child as a dependant and therefore realize significant tax savings.

As the old adage goes, nothing is certain but death and taxes. In divorce, Uncle Sam is sure to take his cut. But, with the proper planning, and the right legal help, you can ensure that the tax bite taken out of your divorce is more of a nibble that a chomp.

Source:Fox Business, “The Tax Rules of Alimony,” Bonnie Lee, June 12, 2014

Tags: Blog, Tax Controversies