A divorce is known to be one of the most emotionally and psychologically challenging events that a person can endure. Many a San Antonio couple can attest to this, having weathered such experiences themselves. Every divorce is unique by nature. Some couples must work to find agreements on child custody and visitation plans while others have to face other divorce legal issues such as prenuptial agreements. Regardless of the situation, the financial impact of a divorce is typically a concern to all couples.
Taxes are a common financial concern to divorcing spouses as many elements of a divorce decree can affect one or both parties’ tax bills for many years to come. Child support does not directly affect taxes as it is not viewed as income so is not taxable to the receiving spouse nor deductible for the paying spouse. Alimony, however, is considered income in the eyes of the Internal Revenue Service for anyone who receives this form of support. This also means that the spouse that pays alimony can deduct those payments from his or her taxable income.
Some crafty couples may think that the taxable nature of alimony can provide them with a way to lower their joint tax liabilities by funneling some other support, such as child support, or property division distributions as alimony. Depending upon the incomes of both parties, doing so may reduce the overall tax bill of the two people together. However, caution is urged with this approach as the IRS Code Section 71 accounts for this and can leave taxpayers with a high bill.
Working through a divorce is hard enough and adding worries about taxes can make the process even harder. In order to avoid problems with ongoing tax bills and assessments, it may be a wise idea to get a legal consultation.
Source: Forbes, “Alimony That Does Not Look Like Alimony,” Peter J. Reilly, April 30, 2014