If you are going through a divorce or separation, taxes may be the last thing on your mind. However, poor tax planning during this process can lead to huge headaches down the road. We have experience helping clients navigate the potential tax pitfalls that can negatively impact their marital estate. We can work alongside your divorce attorney to ensure that provisions included in divorce agreements or settlements resolve tax issues to your benefit.
What are some of the tax issues that should be discussed during and before divorce or separation?
Changes in your Tax Rate. Filing status, claiming dependents, real estate, and asset liquidation can all affect your tax bracket. We can help address the various factors that can impact your tax liability.
Alimony Payments. For all divorces finalized after January 1, 2019, alimony payments are no longer tax deductible for the spouse who pays them and are not considered as income for the spouse who receives the payment. This should be taken into consideration before writing a divorce settlement as it can have a negative impact especially on the spouse who will be paying the alimony.
Non-liquid assets. Although some funds can be transferred tax and penalty-free with a certified divorce decree, others will require what is called a Qualified Domestic Relations Order (QDRO). Transfers involving QDROs must be handled in accordance with IRS regulations to be treated as tax and penalty free.
Tax credits and carryovers. Tax credits and carryovers can have significant value, just like your assets. The division of these items should be discussed before any agreements are finalized.
Every divorce/separation situation is unique and requires careful tax planning to avoid negative results. Consulting a tax expert now can alleviate financial burdens in the future.