TAX RESOLUTION SERVICES - ORLANDO

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Divorce and Tax Considerations

Divorce is a difficult and emotional process, and the tax consequences of a divorce can make it even more complex. In this article, we will explore some of the key tax considerations that come into play during divorce.

Property Division

During a divorce, property is typically divided between the parties. This property can include assets such as real estate, investments, retirement accounts, and personal property. The tax implications of the property division will depend on the specific assets involved. For example, if a couple is dividing a retirement account, such as a 401(k) or IRA, the transfer of funds will generally not trigger any tax consequences. However, if one party receives a distribution from the retirement account as part of the property division, they will be responsible for paying taxes on the distribution.

Alimony

Alimony, also known as spousal support, is a payment made by one party to the other party following a divorce. Alimony payments are generally tax-deductible for the paying spouse and taxable income for the receiving spouse. However, this will change starting in 2019, as the Tax Cuts and Jobs Act eliminates the deduction for alimony payments for divorces or separations finalized after December 31, 2018.

Child Support

Child support is another important consideration during a divorce. Unlike alimony, child support is not tax-deductible for the paying spouse and is not taxable income for the receiving spouse. This means that the tax implications of child support are generally straightforward.

Child Tax Credit

Parents who are divorcing will also need to consider the child tax credit. This credit is available to parents who have children under the age of 17. The credit is worth up to $2,000 per child and is phased out for high-income taxpayers. When parents are divorced, the child tax credit can only be claimed by the parent who has custody of the child for the majority of the year. However, this can be a point of contention between divorcing parents, so it’s important to work with an attorney to ensure that the child tax credit is allocated correctly.

Head of Household Status

Another important tax consideration for divorced taxpayers is head of household status. To qualify for head of household status, a taxpayer must be unmarried or considered unmarried as of the last day of the tax year, must have paid more than half the cost of maintaining a household for the year, and must have a qualifying dependent living with them for more than half the year.

If a divorced parent has custody of a child for more than half the year, they may be able to qualify for head of household status. This can provide a significant tax benefit, as the standard deduction for head of household is higher than the standard deduction for single taxpayers.

Qualified Domestic Relations Orders

One final tax consideration for divorcing couples is the use of a Qualified Domestic Relations Order (QDRO). A QDRO is a court order that allows for the transfer of retirement plan assets from one spouse to the other as part of a divorce settlement. The transfer of retirement plan assets can be a complex process, and it’s important to work with an experienced attorney and financial advisor to ensure that the transfer is done correctly.

In addition to the transfer of retirement plan assets, a QDRO can also be used to allocate survivor benefits to a former spouse. This is important in cases where a retirement plan participant dies, as the survivor benefits will be paid to the designated beneficiary. Without a QDRO, a former spouse may not be entitled to any survivor benefits.

Conclusion

Divorce can be a difficult and emotional process, but understanding the tax consequences of a divorce can help make the process a little bit easier. Working with an experienced attorney and financial advisor can help ensure that all tax considerations are taken into account