Not only is the divorce process stressful and a drain on emotions as agreements on child custody and property division must be hammered out, but it can also be a financial drain. A hasty decision or a vaguely worded provision in your divorce judgment could cause problems years down the road. For instance, it is easy to overlook what happens when filing tax returns in future years. Contact a Mathews Group attorney to avoid mistakes that cost you financially.
Property division and taxes
Couples must be careful in how they structure the transfer of assets. Generally, property received in a divorce is a "gift" and non-taxable for income tax purposes. However, there could be future tax issues related to the basis of the property, which will affect your tax burden if you sell a rental property or assets in a stock portfolio.
In some cases, a lump sum payment may take the place of monthly alimony or spousal support. Spousal support is income to the spouse receiving it. The spouse paying receives a deduction. With a lump sum payment, a large tax bill may be sneak up unexpectedly. A divorce attorney can spot possible tax issues and create an agreement that does not leave surprise tax obligations.
Tax filing status changes to head or household or single will also affect your tax bracket and could mean larger tax bills. In addition, if your divorce is not final before the end of year, you may have an extra year where it makes sense to file married filing jointly.
Unplanned childcare costs
When there are children involved, usually there is a child support order that helps the spouse with sole physical custody pay for necessary child-related expenses. The court uses an income shares model to determine the exact amount of child support. Each of the parties financial information goes into Form 14, which provides the presumed child support calculation. The court then reviews whether the amount is unjust or inappropriate under the circumstances.
A couple must consider that often children will have last minute expenses that pop up and it can be hard to split every item. The parent who has sole physical custody may find he or she has additional costs not covered by child support.
For tax purposes, child support does not have any effect. The person paying child support does not get a deduction and the one receiving it does not claim it as income.
Child dependency exemption
Often parents will rotate the dependency exemption or split the exemptions with one parent claiming the oldest child and the other claiming the youngest. If there is no agreement, usually the parent with sole physical custody receives the dependency exemption. The dependency exemption may become a point of contention, if not addressed in the final divorce judgment, because it can often greatly affect the amount of a tax refund or liability.
Before reaching a final settlement, consider future tax and financial concerns. An experienced family law attorney can answer questions and ensure that your best interests are protected in a divorce settlement. We encourage you to schedule a free consultation online or call us at 913-660-0664 to discuss your case today.