Raleigh, N.C. Lee Rosen, founder and president of Rosen Law Firm, offers a few useful tax tips for those who are recently separated or divorce. Rosen says the stakes are high and the penalties for mistakes are severe, so people need to be familiar with the following four tax implications that could affect their return:
1. The Key Difference Between Alimony and Child Support
Alimony is tax deductible by the payer and child support is not. Similarly, alimony is taxable income to the receiving spouse, while child support is not. When negotiating a divorce settlement, people sometimes (mistakenly) believe that alimony and child support dollars are equivalent.
2. The Tax Impact of Dividing Property
According to §1041 of the Internal Revenue Code, the division of property in a divorce is not a taxable event. There is, however, a potentially huge tax impact hidden within: tax basis. While some property (such as cash) carries no capital gain when sold and other property (such as a residence owned by the taxpayer) has an exemption from capital gain up to a given dollar amount, many forms of investment will be hit with a capital gains tax when sold.
3. Understanding Your Filing Status
There are different filing statuses available (depending on certain factors) for those going through divorce: single, married, or head of household. Different statuses (as well as the decision whether to file jointly or separately with a spouse) may yield significantly different tax liabilities.
4. Which of Your Divorce Attorney’s Fees Are Tax Deductible
Unfortunately, most of the fees paid to a divorce attorney are not tax deductible. There is, though, one loophole: §212 of the Internal Revenue Code allow that fees paid to a divorce attorney in the production or collection of gross income are tax deductible.
