Every separation is unique.
Some separations involve complex tax issues that require an experienced family law attorney to avoid any additional tax consequences on your end.
Here are some examples:
- Child support and Dependent Deduction: child support payments are not deductible by the payor or taxable by the payee. Dependency exemptions vary case by case.
- Alimony: Alimony payments are tax deductible by the payor and must be claimed as income by the recipient. It is a good idea to include federal tax code IRC 71 directly in your decree to ensure both parties are aware of their responsibilities and prevent a claim of ignorance when it comes time to file. However, there may be exemptions to consider depending on how your court order or separation agreement are drafted.
- Property transfer: a transfer of property between divorcing spouses does not induce any additional tax liabilities if it is ordered under the decree of divorce. However, you need an experienced family law attorney to draft the correct language to avoid any penalties.
- Retirement account transfer: to avoid any additional taxes that may be applicable for early withdrawal penalties from qualified retirementplans, a Qualified Domestic Relations Order must be drafted after the divorce is finalized to instruct the plan administrator to pay out benefits to your former spouse. This is often a complex court order that involves your attorney working closely with the plan administrator. It is also best to handle the transfer of retirement funds as soon as reasonably possible after the entry of an order or execution of an agreement.While many people handle their own taxes on an annual basis, I always advise my clients to meet with a financial planner, CPA, or a Tax Attorney prior to filing taxes maximize their return, eliminate errors, and prevent issues down the road.