Divorce gets complicated on several levels. Personally, emotionally, and financially, it can take a toll. Among these layers are further sublayers that are important to be aware of. For instance, among the financial consequences of divorce lie tax considerations. Tax changes that come with divorce, for instance, can have a significant impact on post-divorce finances. While the potential for long-term tax consequences may be far from your mind, you should take care to keep these potential tax impacts in mind. Tax problems that develop incident to divorce can be complex, difficult to handle, and expensive to address.
Tax Consequences of Divorce
There are several issues incident to divorce that can have tax consequences. For starters, transferring property related to the division of the marital assets can have tax consequences. In general, a property transfer that results from a divorce is considered to be a non-taxable event for purposes of both federal income tax and gift tax. Under certain circumstances, however, you may want to consider waiving the tax-free treatment of these transfers. The creation of a taxable event means that it can be treated as a true sale after more than one year since the divorce’s finalization. This allows the purchasing spouse to share benefits from the increased cost basis on the property that has been sold/transferred.
You should also consider the value of tax carryovers when addressing issues incident to divorce such as division of the marital property. In negotiating the division of the marital assets and liabilities, there are things beyond the actual value of the asset or the amount of the liability that should be considered. There are capital losses, net operating losses, charitable deductions, and more to these transfers that have inherent value. Should you delay in discussing these windfalls, you may miss out on reaping the benefits of these tax carryovers.
One more tax consequence to consider in the division of the marital assets should arise if there has been a division of retirement assets incident to the divorce. Preparing required QDROs is essential. It will allow you to avoid tax consequences associated with early withdrawal of retirement funds.
If alimony may be awarded in your divorce, it can also be important to understand the tax consequences of alimony payments. Legislation passed in 2017 eliminated the ability to take a tax deduction for many expenses that were previously deductible, alimony payments included. Divorce agreements established in 2019 and going forward do not allow for tax-deductible alimony payments to be taken by the paying spouse. Furthermore, alimony payments are no longer taxable for the spouse receiving the payments.
If you have children resulting from the marriage, you and your spouse will also need to sort out who will get tax credits from claiming a child as a dependent. A child can only be claimed by one of you. While there is the presumption that the parent with primary physical custody of the child for most of the year is entitled to the tax credit, this may not always be the case. Sometimes, the non-custodial parent may be better situated to claim the credit. In some instances, a divorcing couple may want to alternate who gets the credit from year to year. If there is more than one child, one spouse may take credit for one of them and the other spouse takes credit for the other one.
Florida Family Law Attorneys
At Orlando Family Team, our team keeps in mind your best interests far into your post-divorce life. We are here to set you up for a successful future long after the divorce has been finalized. This includes taking things like tax consequences into consideration as we navigate your divorce arrangements. Contact us today.