Tax Considerations in Divorce

The U.S. Tax Code is very complex. It is important to understand the present and future tax ramifications so that there are no surprises after a divorce is final.  At our office, we make sure that clients understand the tax issues associated with their divorce.  Here’s how we can help.

High Net Worth Marital Estates and Unique Tax Matters

If you have a high value marital estate, or unique tax issues we will refer you to tax experts to make sure you understand all of the tax ramifications of your divorce. We will also work closely with your tax expert to optimize the property division aspects of your divorce. Subject to the foregoing, the transfer of property between spouses at the time of a divorce is generally not a taxable event. However, the subsequent sale of such assets is generally a taxable event.

Income Tax Filings

Other tax issues that divorcing couples face include:

  • which income tax filing status to use when going through a divorce,
  • which parent may claim the children as exemptions,
  • whether child support is taxable,
  • whether maintenance payments are tax-deductible, and
  • whether legal fees in obtaining a divorce are tax-deductible.

As far as filing status, if you are not divorced by the end of the year, you and your spouse may file a joint tax return or separate returns. The most beneficial filing status will often depend on several factors including the amount of tax owed or refund due, and the fact that if you and your spouse file jointly you can be held responsible for all of the taxes due.

With respect to whether you can claim the children for tax exemption purposes, such matters are typically set forth in the Marital Settlement Agreement. If not set forth there or in the Judgment for Dissolution of Marriage, the parent who had physical residential custody of the child for the greater part of the year may typically claim the child for tax exemption purposes.  Child Support alone is not taxable to the parent receiving the child support or deductible by the parent paying child support.

Payments which properly qualify as Maintenance and are made pursuant to a valid Court order are taxable to the recipient spouse and deductible by the payor spouse whether paid before or after the Judgment of Dissolution of Marriage. Typically, most Legal Fees paid to obtain a divorce are not deductible; however, there are certain exceptions, such as legal fees paid for tax advice in connection with a divorce.

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