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Tax Implications of Divorce

Many decisions need to be made during a divorce, and it can be somewhat overwhelming. The last thing couples are usually thinking about is taxes. However, there are tax implications from a divorce, and you'll need to make sure you understand the basics and work with a qualified accountant or CPA who can provide guidance when it comes to filing your taxes.

Property Settlements: The good news about property settlements is that the IRS doesn't consider the transfer of assets between divorcing spouses a taxable event. However, selling property, whether it's the marital residence, mutual funds, artwork, retirement funds, etc. can get tricky when it comes to tax implications. Some assets (like a mortgage) involve tax liabilities and some don't, so it's very important that you understand the tax implications of each type of asset before you agree to anything. Many unsuspecting spouses have subjected themselves to a gigantic tax bill unknowingly!

Child Support Payments: Contrary to what some divorcing couples have heard or think, child support payments are NOT deductible from your personal income taxes. Child support is not considered taxable income by the IRS. Many divorcing spouses feel this is unfair, but the IRS makes the rules, and we just follow them, right?!

Child Exemptions: Another topic related to children is who gets the tax exemption and tax benefits pertaining to the children. Generally the exemption goes to the parent who has custody, however this can be (and often is) negotiated if you and your ex-spouse have joint physical custody.

Alimony/Spousal Support: Spousal support, or alimony, is treated as taxable income to the recipient, by the IRS, and can be deducted by the person paying the spousal support. It should also be noted that both spouses must also file separate tax returns as a prerequisite to alimony arrangements. Also, if you're thinking about disguising property settlement or child support money as alimony (and trying to deduct it) think again. This will quickly trigger an investigation by the IRS!

Head of Household Status: Who gets to claim the Head of Household status on their taxes is often a point of contention and discussion among divorcing spouses. Again, to be considered "Head of Household" you need to file separate tax returns, and you and your spouse cannot have lived together at any time during the last 6 months of the tax year in question. It is worth noting that you can claim Head of Household even if your ex-spouse has claimed the tax exemption for your children, though they need to have lived with you for more than six months of the year.

We hope we've answered your frequently asked questions about the tax implications of divorce. As discussed, it can be quite complex (and confusing) so we definitely recommend working with a qualified professional accountant or CPA who can provide you the latest up to date information on the IRS rules and guidelines.

Disclaimer – The materials contained in this blog have been prepared for informational purposes only. The information contained is general in nature, and may not apply to particular factual or legal circumstances. In any event, the materials do not constitute legal advice or opinions and should not be relied up on as such.

(Source: The Tax Implications of Divorce, turbotax.intuit.com)

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