A divorce settlement will address property, assets, and debts and how these will be evenly divided, but what a settlement does not lay out is how your taxes will be affected by this division. Taxes need to play a considerable role in negotiating a divorce settlement, especially when children are involved.
What should I know about taxes?
Not only will the outcome of the settlement affect the kinds and amounts of taxes you may have to pay, but additionally, there are rules in the tax code that specifically applies to divorce and separation. Be sure to know of these rules to prevent an unexpected surprise from Uncle Sam.
Three tax rules to know after divorce are:
- Dependency exemption. The custodial parent of any children involved in the divorce can claim the dependent exemption on their taxes, unless they choose to give the non-custodial parent this exemption. If they give the dependency exemption away, the IRS Form 8332 must be signed and attached to the non-custodial parent's income tax return. No matter what, the custodial parent is able to claim Head of Household filing and other tax credits.
- Child support. Child support is non-deductible and does not count as income to the person receiving it. Because of this, there are no tax rules concerning this payment.
- Alimony. Alimony is considered income and taxed accordingly, with the person paying alimony using this as a tax-deduction. The Social Security number of the former spouse must be included on an income tax filing since the IRS will check both filings to ensure the financial amounts match.
Taxes are taken out of every paycheck, and every effort should be taken to ensure that you are not paying more for your divorce than you need to be. Working with professional and experts while the divorce settlement is being drafted can take some of these financial concerns into consideration to ensure a fair outcome.