When most people think about divorce, they think of the hassles and headaches associated with making child custody arrangements, splitting marital property and setting up two separate households. Most divorcing parties do not consider the tax consequences or what impact the divorce will have on each party.
Since 2010 is the first year that the divorce rate rose since the economic downturn began in late 2007, these considerations will be important to more people than ever before. In May of 2011, the U.S. Census Bureau issued a report noting that about 21 percent of men and 22 percent of women have divorced in their lifetimes, meaning that the tax issues arising from divorce are well-documented.
Marital Status on the Tax Return
A basic change to a divorced party’s tax return after divorce is the filing status. Whether filing as married for a specific tax year depends on the date of the entry of the divorce. When married filing jointly is no longer an option, divorcing parties must decide whether to file as single or head of household. The filing status is important for a number of reasons, including complications that can arise when the marital home is sold as part of the divorce proceedings. It is important to consult with an accountant or other tax specialist to ensure that all tax decisions are made timely and correctly.
The Effects of Child Support and Alimony Payments
Although child support is generally not considered as taxable income, Spousal support payments, or alimony, are considered as taxable income to the recipient and a tax deduction to the paying party. In either scenario, there is an impact on the overall tax liability. It is important to discuss these matters with an attorney to distinguish the difference between alimony and child support payments. It is also important to distinguish between spousal support or alimony and those monies received as part of a marital property settlement.
Finally, children are dependents in the tax sense and thus, the parent who is able to claim children will need to consider the tax benefits, the associated credits, and other applicable deductions. Divorce agreements may also specify who may take certain credits and the tax deductions for the children, and in what years.
The information herein is a quick overview of some of the tax issues which must be considered by divorcing parties. There are more, and as such, it is important to retain an experienced and knowledgeable attorney to help navigate through this complex area of divorce. An experienced divorce lawyer is essential to the process as he or she can provide all information needed. A divorce is a difficult process without getting bogged down in tax considerations. Therefore, it is important to seek the counsel of a skilled family law attorney in the local area who can clearly explain the tax consequences of a divorce.