Tax Considerations For Divorce Settlement Negotiations
Divorce creates a wide variety of tax issues. Those issues must be investigated before reaching a final divorce settlement. Resolving these tax issues after a divorce settlement can substantially add to the cost of your divorce. An experienced, qualified family law attorney can help spot these issues.
Tax Considerations of Liquidating Any Retirement Accounts
If one of the parties has liquidated a retirement account during the divorce, it would subject both parties to federal income tax liability. If this has occurred, determine the amount of tax liability prior to entering into a final settlement. This issue should be addressed in the final settlement, including who will pay the tax liability. One party may be awarded a portion of the other party’s pension. This is done with a Qualified Domestic Relations Order or QDRO. There may be an option for liquidating those funds without penalty, paying only appropriate federal income taxes. This can be helpful if liquid funds are needed to pay off debt. However, consult with a professional to determine any tax consequences.
Determine the Status of Tax Return Filings in Each Year of Marriage
In general, final divorce decrees provide that each party is equally liable for federal taxes due and each party is entitled to one-half of a tax refund for years of the marriage. This may not be appropriate in every situation. The parties must determine if federal taxes have been filed for each year of the marriage. Obtain copies of tax returns for each year of marriage, going back at least seven years. Also, discuss with a tax professional the likelihood of a future audit of prior year’s taxes and the likelihood of future tax liability as a result.
Tax Returns In the Year of Your Divorce
For the year your divorce is finalized, each party will file separate tax returns. Marital status for tax filing is determined by marital status on the last day of the year. Issues includes division of any itemized deductions, mortgage interest deduction and any charitable donations. These details need to be addressed in the final divorce decree.
Child Related Tax Deductions
The final divorce decree should also detail how child related tax deductions will be divided. This can be a useful tool for negating a final settlement. Again, it can be helpful to consult with a tax expert to determine how best to handle child related tax deductions.
Alimony Payments
Some final divorce decrees will order alimony payments, also known as spousal maintenance. Tax consequences for both parties must be considered. This can also be helpful if taken into consideration during negotiations toward a settlement.
Reach Out to Family Law Attorney Sandra Bonfiglio
Sandra Bonfiglio is an experienced family law attorney. The lawyers at our office offer sympathetic counsel, practical advice, and aggressive representation. If you are considering a divorce, contact Fort Lauderdale divorce attorney Sandra Bonfiglio for a free consultation.