When you are getting a fresh emotional start in your life by getting a divorce, taxes may be far from your mind.
That is entirely understandable, because divorce can be a stressful time. But it is still worth taking the time to think strategically about how tax issues can affect your divorce.
In this post, we will take note of some of those issues.
For starters, keep in mind that if alimony or spousal maintenance payments are involved in your divorce, it is good to know how those payments are treated for tax purposes.
The general rule is that tax deductions are available for alimony payments. As the IRS explains, however, not all payments made to an ex-spouse qualify for the deduction. Most prominently, child support payments are not deductible.
We should also point out that alimony payments that are received by an ex-spouse are considered taxable income. This can create discrepancies that catch the attention of the IRS when tax deductions claimed for alimony payments exceed the amount that is reported as income.
In some cases, this discrepancy could result in additional IRS scrutiny of a divorced person’s tax return.
This is only one example of the types of tax issues that can arise in a divorce. Another example is the treatment of funds that are held in a retirement account.
When one of the divorcing spouses has a substantial pension or retirement assets and the other does not, issues regarding whether and how to divide the account naturally arise.
Tax issues can be especially important in determining an ex-spouse’s best course of action in such cases. For instance, let’s say that an ex-spouse has been awarded a share of the other spouse’s retirement account.
In such cases, many financial planners recommend that an ex-spouse try to avoid making early withdrawals from the account. The reason for this is to keep the money tax-deferred for a longer period of time.
Source: Forbes, “The Big Money Mistake Divorcing Women Make,” Kerry Hannon, July 3, 2014