Filing your tax returns can already be a painstaking and tedious process, and the process can become even more complex when you’re going through a divorce. This article will serve as a starting point for the four basic things you must know about divorce and taxes. Going forward, you should pay close attention to:
- The differences between alimony and child support;
- The tax implications associated with dividing property;
- Understanding how you should file; and
- Whether your divorce attorney’s fees are tax deductible.
Alimony is support paid from a supporting spouse to a dependent spouse. Child support, on the other hand, is paid by one spouse to the other solely for the benefit of the child. Not only are spousal support and child support different in terms of who can benefit, they also have different tax implications. Alimony is considered taxable income for the receiving spouse and deductible for the payor spouse; however child support is not considered taxable income nor is it a deductible for the payor spouse.
In terms of dividing property, the division of property is not a taxable event. However, there is still a significant tax impact. A tax basis is the price used to determine the capital gains tax when property is sold (usually the purchase price). While some property (such as cash) carries no capital gain when sold and other property (such as a residence owned by the taxpayer) has an exemption from capital gain up to a given dollar amount, many forms of investment will be hit with a capital gains tax when sold.
In addition to the division of property and support payments, you should also pay close attention to your filing status now that you are going through a divorce. There are different filing statuses available (depending on certain factors) for those going through divorce: single, married, or head of household. Different statuses (as well as the decision whether to file jointly or separately with a spouse) may yield significantly different tax liabilities. To figure out what filing status works best for you, it may be in your best interest to prepare different returns with different filing statuses to see which status has the best impact for you.
Finally, make note that most of the fees you’ll have to pay to your divorce attorney will not be tax deductible. However, fees paid to a divorce attorney in the production or collection of gross income are tax deductible. While probably not all, or even most, of the fees you’ve paid will qualify under for this deduction, a knowledgeable divorce attorney will help you make sure you receive credit for every tax-deductible dollar you have paid.