Taxes and Divorce
I’m not big on talking about depressing topics, but it’s tax season, so I suppose anything having to do with taxes is depressing, huh? Anyway, today we’re going to look at a doubly depressing topic: divorce and taxes. When divorce happens, there’s always a mess with the money and the property between the two parties involved. We’re going to look at a couple of categories of property and moneys and talk about their impact on your taxes.
Alimony vs. Child Support. These are two very different things. Alimony is money that a spouse receives because one spouse makes significantly less income than the other. The court makes the ultimate decision as to whether or not a spouse gets alimony, and how much that alimony is. Now, because this is considered another form of income for the spouse who is receiving it, it is taxable and must be claimed as thus.
Child support, on the other hand, is where the spouse who has primary custody of the children receives money to help support the children (and for nothing else- it is a prosecutable offense to use these funds for anything but things that primarily support the children involved. Because this money is meant for your children, it is not taxable (unless it’s found to be used for purposes other than
Filing Status. You are required to file jointly if you were married through the last day of the tax year (yes, December 31st), unless you already had reasons to be married filing separately. Now, if you were not married through the whole year, in most cases, you will be filing separately. This doesn’t change even if you were living separately throughout the year: If you were not technically divorced, then you should file together.
Who claims the kids? Well, it depends on the filing status that we just discussed. If you’re filing together, then the kids are claimed on it. If you are filing separately, then the person who claims the kids is referred to as the custodial parent. The custodial parent, in short, is the parent that has the child the most nights out of the year. They get any and all benefits from claiming the child(ren) as their dependant(s).
IRA’s and other retirement accounts. If you had a joint IRA or other retirement account and one of the spouses gets part of the account as part of the divorce agreement, they can be transferred tax-free if the interest on the IRA is transferred and there’s proof of it being part of the divorce agreement. Now, although this sounds straightforward, it can cause a lot of complications if done incorrectly. There have been court cases where people have instead cashed out their IRA and given the money to their spouse, only to be slammed with the taxes on that “income” and the 10% penalty later on.
Divorce is one of those things that we don’t like to think about, but because over 50% of marriages end in divorce, it’s a sad truth that many of us may have to face. If you know your rights ahead of time, and always consult your lawyer and/or tax professional, you can save some of the headache that comes along with the financial end of divorce.
