If you’re thinking about initiating a divorce, it’s important to take a broad look at the tax implications. Whether you fall right in line with the median income or have significant assets and liquidity, analyzing the tax implications ahead of a divorce can help you decide if going through the battles and negotiations are right for you.
Below are a number of specific situations to consider as you go through the divorce and how things could look once negotiations are completed.
Alimony Payments to an Ex-Spouse
If you’re the spouse who will be paying alimony, those payments are a tax deduction, even without itemizing. It’s important to note that the IRS won’t consider those payments actual alimony unless they’re mentioned in the formal divorce agreement. Your former spouse will have to pay income tax on those payments.
Medical Expenses
If you continue to pay for your child’s medical bills after the divorce finalized, you can include those costs in the medical expense deduction even if your ex-spouse retains custody.
Property Settlements
In most cases, property transfers between spouses or former spouses are seen as gifts, according to the IRS. This means that you won’t be immediately taxed for that transaction, but whoever sells the property may have to pay taxes later on.
Tax Credits
Only the parent who claims a child as a dependent can claim the $1,000 child tax credit, however, you can continue to claim the child-care credit for work expenses you have to take care of an under-13 child.
Retirement Plans
If you have to withdraw from your 401(k) to pay your ex-spouse after a divorce, then you will have to pay taxes related to that. However, you could avoid the liability if you can get the transfer listed under a qualified domestic relations order (QDRO), which gives the recipient the rights to those funds and relieves you of the tax burden. A QDRO should be spelled out in the divorce settlement to clearly delineate those specific funds used for that purpose.
When it comes to the tax implications of a divorce, there are myriad issues to consider. Alongside the help of a CPA, it’s important to consult a qualified Dayton, Ohio divorce attorney. Call Richard P. Arthur, Attorney at Law today to learn more about how he can help guide you through the financial negotiations of a divorce.