Tax Consequences of Your Divorce Agreement
While dealing with your divorce, tax season might seem like an unpleasant, unrelated matter. However, your divorce terms can have a substantial effect on the taxes you owe in the year you divorce and in subsequent years.
Keep in mind these tax implications when negotiating terms of your divorce settlement:
- Court-ordered spousal support — The IRS treats spousal support like income. As a result, you are entitled to deduct spousal support you pay to your spouse. Conversely, you must report the amount of spousal support you receive as taxable income, unless the court orders otherwise.
- Voluntary payments to your spouse — The IRS does not recognize an informal agreement for spousal support. Therefore, you cannot claim a tax deduction of money you voluntarily give to your spouse that is not ordered by the court.
- Child support — You do not owe taxes on child support you receive. If you pay child support, you cannot count the money as a deduction.
- Exemptions for dependents — Unless the parents agree otherwise, the custodial parent usually is entitled to claim the dependent exemption. However, you are allowed to negotiate this benefit, as long as both parties satisfy the IRS rules for claiming the exemption. For instance, you might decide that you claim the dependent exemption in odd years and the other parent claims the exemption in even years. If you stand to gain the most advantage, you might exchange an asset in return for your right to claim the exemption in all years.
- Head of Household status — In custodial arrangements with equal or near equal parenting time, the parties should also designate who will claim the head of household status. It can be negotiated in a similar manner as the exemptions are negotiated.
- Property division — Because the transfer of marital property occurred between spouses, the IRS does not recognize gains or losses resulting from division of assets associated with divorce. There are some exceptions to this rule a lawyer can explain to you.
- Divorce of same-sex couples — Since the Supreme Court overturned the Defense of Marriage Act (DOMA) last summer, same-sex marriage and divorce in Minnesota is now subject to the same IRS rules and benefits as heterosexual nuptials and dissolutions in the state.
Divorce is tough enough. Do not pay the IRS more than you owe. An experienced St. Paul family law attorney can strategize divorce terms that do not unnecessarily negatively affect your tax liability.