Divorce and Taxes: How they can affect your financial future
Taxes are guaranteed to be a complication of every divorce financial settlement. Misunderstanding the tax code, even worse completely ignoring it, can have devastating effects on your financial future.
The errors get more costly and more common when estates and incomes get larger and people start getting creative. Negotiating a creative and mutually beneficial divorce financial settlement can be complicated when you have significant assets and income. Make sure you and your attorney have the help of a financial expert skilled and experienced in navigating the tax codes of divorce. Here are some common errors.
Exemptions
Failure to consider the value of dependency exemptions and filing status for income taxes. High earners are often phased out of using dependency exemptions, failure to negotiate the use post divorce could waste tax dollars.
Child Support
Not understanding the difference between child support and spousal support for tax purposes. Spousal support is taxable to the recipient, tax deductible for the payer.
Spousal Support
Structuring future changes in spousal support in close proximity to an event or mile-stone related to your children. This is also known as the Child Contingency rule and could cause tax deductible spousal support payments to be re-classified as non-deductible child support.
Attorney Fees
Failure to deduct attorney fees related to spousal support dispute as a miscellaneous itemized deduction. Yes your attorney fees are deductible to the extent they were incurred in the process of seeking tax advice or spousal support. You will need to ask your lawyer for an itemized break out of the litgiation costs. This can be incredibly valuable in protracted, expensive litigation.
IRS
Running afoul of Section 1041 of the internal revenue code. Section 1041 is the IRS code that allows spouses, married or divorcing, to transfer assets to one another without tax consequence. There are however rules to follow like how ling you have to complete a transaction.
Incorrect Assumptions
Assuming your CPA understands the tax code related to divorce. They can certainly look things up but it is a bad idea to assume your CPA understands the tax intricacies of divorce. The last time I spoke to a California Society of Certified Public Accountants group there were 200+ CPA’s in the room and 200+ questions after the presentation.
Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.
Contact us to find out how we can help you through this process.
