A finalized divorce decree results in more than just the end of a marriage, it also results in a division of assets. If not done carefully, the settlement agreement can result in unexpected surprises. One area that can lead to unexpected outcomes is the impact a divorce will have on your taxes.
Why should tax considerations play a role in divorce negotiations?
Whenever assets are transferred it is wise to consider any potential tax implications. This is especially true during divorce. In fact, the issue is so prevalent that the Internal Revenue Service (IRS) recently issued a tax tip focusing on this specific issue.
Three examples touched on by the agency that those going through a divorce should keep in mind during the divorce settlement negotiations are:
- Alimony. If you are considering requesting or providing alimony payments it is important to take the tax implications into account before coming up with a final agreement. Generally, alimony that is paid to a spouse or former spouse can be deducted from the payer's tax return as long as these payments are included within the divorce decree. Voluntary payments, or those that are not outlined within the final divorce settlement agreement, are not eligible. On the flip side, taxes apply to the person receiving the payments as the IRS essentially views these as a form of income.
- Child support. If children are present, child support will likely be paid. Unlike alimony payments, child support is not a deductible expense. Those making these payments should not attempt to claim the expense as a deduction on tax returns.
- IRA contributions. Wise retirement planning takes advantage of various tax benefits tied to certain contributions. One example is the tax benefit tied to contributing to an IRA. It is important to note that you cannot claim deductions for contributions made to a former spouse's IRA for the tax year of the divorce.
These are just three of the many implications that should be taken into consideration when negotiating a final decree of divorce. Due to the complex nature of divorce, it is wise for those considering or who have recently filed for a divorce to seek the counsel of an experienced divorce attorney. This legal professional will advocate for your rights, working to better ensure a more favorable outcome.