Divorce
can be an emotionally draining process. If you are in the middle of one, you
probably just want it to be over. But be careful. Divorce has serious tax
implications, and the choices you make now may affect you for many years.
Consider the following:
* Alimony and child support. Alimony
is tax-deductible if you pay it and taxable income if you receive it. Child
support, on the other hand, is neither tax-deductible nor taxable as income.
* Exemptions. If you are awarded
physical custody of your child, you will usually be entitled to the tax
benefits related to that child. Special rules may apply if you share custody.
In addition to a $4,000 dependency tax deduction, tax benefits may include the
dependent care credit, the child tax credit, the earned income credit, and
education tax credits. You can transfer your right to claim your child to your
former spouse each year, for tax purposes, by signing a special IRS form.
* Retirement accounts and IRAs. Your
former spouse may be awarded part of your retirement account or IRA. If your
ex-spouse receives the benefits, he or she will generally be responsible for
the taxes. But unless the accounts are divided and transferred in just the
right way, you could end up paying the tax.
* Property settlements. You are
allowed to transfer property (house, cars, investments, etc.) to your ex-spouse
without triggering income tax, if it's part of your settlement agreement. But
whoever ends up with your marital assets may owe taxes when the assets are
sold. Take future taxes into consideration during your negotiations, or you
might end up with large and unexpected tax liabilities.
Call
us early in the divorce process, and let us help you and your attorney make
informed choices.
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