Divorce can be expensive, especially for high-asset couples with large financial holdings and extensive business assets. The cost of divorce, however, is about much more than lawyer's bills and court costs, it is often about income tax. While the following blog does not address many of the complex issues associated with tax and divorce, particularly the nuances of property division, Minnesota couples may find it as a nice primer on income tax and divorce.
When people file for divorce, they often have a lot of questions. Nonetheless, few people ask about how they should prepare their taxes in the year the divorce is finalized. The first thing to know is that a person's filing status is determined on December 31 of the year in which they are filing. That means that they are classified as either married or divorce for the year by their status of married or divorced on December 31.
Secondly, it is important that divorcing couples understand the income tax implications associated with the terms of the divorce settlement. For instance, despite the fact that child support is paid from one spouse to another, it is not taxable income to the recipient spouse. Furthermore, child support is not deductible to the person making the payments. The opposite, however, is true with spousal maintenance, which is both deductible and classified as income.
Lastly, there are often many questions concerning the tax implications of property division. These questions are a bit more complicated, and often depend on a number of factors. There are ways for an experienced family law attorney to divide an estate with the least amount of financial impact. This is also true when establishing payments, such as alimony. The key is to work with an attorney knowledgeable about both divorce and income tax.
Source: The Huffington Post, "Preparing Your Taxes In The Year of Divorce," Kathleen B. Connell, March 21, 2013
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