Avoiding Tax Problems That Can Come with Divorce

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Divorce-908743Divorce is a trying time on everyone. There are many issues that need to be resolved before anything can be finalized. This is true with material items and financial matters – especially those involving taxes.

It is both extremely important and necessary for both parties to agree on how the taxes will be handled to avoid huge penalties and expenses that will add up if the situation goes unresolved.

While your tax professional can usually head these issues off at the pass before they become a problem, if you, or someone you know, is going through a divorce, here are the issues to be considered:

• Filing Status: How you file will depend on whether your divorce is final or not. If it isn’t, you have the option filing “married filing jointly” or “married filing separately.” Obviously there are tax advantages to filing jointly, however there is also one big consequence to filing this way. If it turns out that you owe instead of a refund, you will be responsible for your spouse’s payments if he or she doesn’t take care of it.

• Taxes on Assets: The division of property acquired during the marriage can produce another set of tax issues. Assets transferred between a married couple are not taxable, so to avoid a large chunk of money being paid out for taxes on assets that are transferred after the divorce is final, make every effort to come to an agreement beforehand.

• Taxes and alimony: Typically this is a cut and dry situation – alimony is NON-taxable for the payee and taxable for the recipient. As with any situation, though, there are exceptions. If it is outlined in the divorce agreement that the alimony will end in the case of the recipient’s death, it’s taxable. If the alimony continues after the recipient’s death, it’s non-taxable. The taxes can be avoided completely if a lump sum settlement is agreed upon either as one payment or on an installment plan, the recipient can receive the money tax free.

The best way to avoid these and any other tax pitfalls that can come with a divorce, talk to a CPA who is well-versed in these situations and let them guide you through the process.