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In 2010, 6.8 percent of the population got married. And 3.4 percent got divorced. Yikes! That means that half of married couples are apt to face the tax issues of getting divorced.
What do you need to know during the process of divorce?
“Family Support” is a dangerous phrase. Never let this phrase appear in your divorce agreement. It is meaningless for tax purposes. Insist that your divorce agreement replace that phrase with either “alimony” or “child support” or both. Child support is not income to the parent receiving it, nor is it deductible to the person paying it. However, alimony is income to the parent who receives it—and deductible to the parent who pays it.
There is a difference between alimony and splitting the marital estate. Not all payments to your ex are alimony. Alimony means supporting your ex from your current income. Sometimes, when dividing the assets, one spouse may be reluctant to sell or cash out an asset. Instead, he or she opts to make installment payments to the ex. That’s not alimony. You’re just paying your former spouse the share of what he or she already owned. Not understanding the tax rules of alimony can result in losing the deduction and paying recapture taxes.
Claiming your child or children must be done with care. This is generally a very nasty battle because there are so many benefits that arise from claiming a child on your tax return.
Problems with this issue are easily avoided at the time of divorce.
1) Have the divorce agreement specify which parent gets to claim which child.
a. In this case, have each parent sign a Form 8332, giving up the right to claim that child for the years the other parent gets him or her.
b. In the event of a disagreement, the IRS regards the signed Form 8332 as the deal-breaker. Otherwise, you face the IRS’s complex rules.
3) If one parent must pay child support, spell out that if the child support is not paid on time, and within the tax year, that parent is not entitled to claim that child.
a. Have this page copied and signed separately, with a provision that non-payment child support will override the signed Form 8332.
b. Attach a copy of this to the signed Form 8332 that is retained by the parent receiving the child support.
Things to read
Aside from being nasty, heart-breaking, and expensive, divorces have tax implications that may affect decades of your future. Be sure to include your tax professional in all the decisions—and have him or her review all papers before you sign them. We can catch tax-related oversights that your attorney doesn’t understand.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.
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