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How Do You Avoid Tax Problems After a Divorce?

Divorce can deplete many of the assets you worked hard to acquire. Among the trickiest financial issues for people getting divorced are the tax implications — which almost always requires a consultation with an experienced lawyer and accountant.

Those facing divorce have the following basic issues to consider:

  • How to file. If you are still legally married on December 31 but not living together, you may use the marital deduction by filing jointly. However, if you do so, the alimony payer cannot deduct alimony paid. If you file “married-separately,” you may benefit from the “head of household” deductions if your child lived with you for more than six months, and you paid more than half the household expenses.
  • Alimony. Alimony payments made pursuant to a divorce agreement are considered income by the recipient, and are deductible expenses for the payer. Under the tax code, there are strict requirements for what constitutes alimony. If these requirements are not met, the deduction will be denied.
  • Child support. Unlike alimony, child support payments are not deductible expenses for the payer, nor are they considered income to the recipient.
  • Transfers. Property transfers among spouses are tax-free only if they are “incident to divorce.” If property is transferred by a divorce or separation agreement, transfers made within the six years subsequent to the divorce are considered incident to divorce.
  • Carryover basis.  If you receive an asset in your divorce, you have a “carryover basis” for that asset. The tax implications occur when you sell the asset. For example, stock purchased for $5,000 dollars awarded to you upon divorce that you subsequently sell for $25,000 will saddle you with a capital gains tax on the $20,000 appreciation. Since cash received incident to divorce is not subject to capital gains tax or income tax, it is generally better to receive cash than an appreciated asset in your divorce settlement.

Everyone’s financial situation is unique. If you have a pending divorce settlement, as a starting point, it generally pays to consult with an experienced Florida accountant and divorce lawyer.

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