Impact of Divorce on Your Income Tax Returns Can Be Costly

Tax (Photo credit: 401K 2012)

When a couple faces divorce, the IRS and taxes are probably the last things on their mind. Divorce, however, carries tax implications that, if ignored, could cost you plenty down the line. The following covers a few basic facts you should be familiar with regarding taxes and your divorce. Because of the complicated nature of these areas, though, it is advisable to consult your financial advisor as well as a divorce attorney before taking actions. If you are a Hunterdon County resident seeking a divorce, the family law attorneys at The Rotolo Law Firm of Lebanon can be of assistance.

Essentially, there are two types of family support payments associated with divorce – alimony and child support – and both have different tax implications.

Alimony is reportable income for the spouse receiving the payments and a deductible expense for the paying spouse and should be noted accordingly on your income tax returns. Child support, on the other hand, is neither deductible for the payee nor reportable income for the receiving spouse. Because of the different tax treatments, it is important to specify the types and amounts of payments agreed upon and not lump them together as “family support” in your divorce settlement. (1)

Separate from the above are payments made as part of the division of marital assets. Sometimes a couple will reach an agreement under which one will buy out the other’s share of certain property jointly owned in the marriage – a house, for instance. That buyout can be made in one lump sum or over time through a mutually agreed upon payment schedule. Payments received under these conditions are not considered income to the receiver. (2)

Your divorce settlement also should identify the custodial parent or, if custody is split over different years, the specific years each parent has custody. This identifies which parent is entitled to list the child as a dependent on tax returns. The benefits to this are being categorized as “head of household,” which changes the rate at which your income is taxed; being able to claim the dependent exemption and other tax credits; and being entitled to deduct certain expenses related to your dependents, such as medical and educational costs. (2)

Couples often file joint tax returns throughout their married life. This means both parties are responsible for taxes due on transactions included in those returns, even if one spouse had no knowledge of the transaction. Ignorance is not a defense where taxes are concerned. The IRS can go after either spouse identified on a joint tax return for taxes owed. (3)

Other less obvious and more complicated tax areas impacted by divorce include tax-sheltered annuities and capital gains from home sales. While divorce settlements can outline responsibilities and include provisions for distribution of capital and “held harmless” agreements, the IRS is bound by none of these. (3)

While married couples generally do not plan for divorce in their future, professionals in the areas of taxes and divorce can help you take steps to protect your assets in the event of this unfortunate outcome. The family law attorneys at The Rotolo Law Firm are well-versed in divorce laws specific to the State of New Jersey and can assist you or someone you know seeking a divorce in Hunterdon County or the surrounding area. The Rotolo Law Firm is located in Lebanon, N.J., just minutes away from both Clinton and Flemington.

(1) http://www.taxslayer.com/support/Print490.aspx
(2) http://blog.equifax.com/tax/how-divorce-affects-your-tax-return/

(3) http://money.cnn.com/magazines/fortune/fortune_archive/1996/03/18/210624/index.htm