When it comes to divorce, there can be big implications for both parties in an area they may not have considered: taxes. It may come as a shock to some who are primarily concerned with removing themselves from a bad situation, but both party’s tax situation and status will change when a divorce is finalized. While it may be best to speak to either an attorney or a tax professional about the full ramifications that a divorce might have when it comes to your taxes, below are a few things that you might consider before speaking to someone.
Generally, the transfer of assets between a divorced couple is considered to be tax-free, but there might be tax issues that occur in some cases, such as when property is involved and must be sold in order to be split evenly. In this case, the taxes will need to be paid as a part of the sale, which can decrease the apparent value of the property to both individuals. Another, similar issue to consider is that of traditionally tax-free investments, like IRAs. While investment in an IRA is tax-free until the funds are accessed, transferring an IRA can have tax ramifications in the present.
Spousal support or child support can also cause tax issues. While it’s true that these agreements are usually taxable on the receiver’s end and deductible on the payer’s end, situations can arise whereby both parties agree to a different arrangement in writing. This should definitely be a consideration in any finalized divorce, and both parties should make sure that they file the appropriate forms with the IRS.
One of the biggest concerns as far as taxes are concerned when filing for divorce is going to be the allocation of dependency exemptions. As a rule, the parent who retains legal custody of the children will be entitled to the exemptions that they IRS gives for caring for children. The only real exception to this rule is when the custodial parent files a written allocation of these exemptions for the non-custodial parent. As with before, these terms should be written in the final divorce paperwork so that there is no mistake about what’s being done.