If you are getting a divorce, taxes are probably not highest on your list of concerns. Still, you should consider a number of tax-related issues.
Property Settlements
Dividing property in connection with a divorce generally has no immediate consequences for either spouse. However, if the spouse who receives property in the divorce settlement later sells it, there may be a gain to report for tax purposes. So, potential taxes should be a consideration in deciding which spouse will receive which property. If you like to figure out feasible ways to settle divorce and related property disputes at the earliest, then speak to one of top lawyers with full acknowledge of texas divorce laws.
Paterson & Dowding family lawyer Perth
Note that a spouse who receives property in a divorce figure any gain on a subsequent sale of the property using the transferring spouse’s basis (e.g., cost), not the property’s value when it was received.
Example. Michelle receives 10 acres of unimproved land in her divorce settlement. Her ex-husband bought the land for $25,000. It’s now worth $100,000. If Michelle sells the land for $100,000, she will have to report a taxable gain of $75,000 (the difference between the $100,000 selling price and the $25,000 cost basis).
Personal Residence
If a divorcing couple sells their home while they are still married, they are entitled to exclude up to $500,000 of gain from their taxable income if otherwise eligible for the exclusion. If the ownership of the home is simply transferred to one spouse as part of the divorce settlement, there is no taxable gain or loss at the time of transfer. However, should that spouse later sell the house while he or she is unmarried, only a $250,000 exclusion would be available.
Consult Paterson & Dowding family lawyer Perth to get help in deciding on the property rights prior to a divorce.
Retirement Benefits
A divorce settlement often determines how retirement plan benefits will be divided. However, an employer may distribute retirement plan benefits to a former spouse only after receiving a court-issued document that meets the requirements for a qualified domestic relations order (QDRO). The benefits are taxable to the former spouse who receives them pursuant to a QDRO.
Dependency Exemption
While the spouse who has legal custody of a child is generally entitled to claim the dependency exemption, this tax advantage is negotiable and can change from year to year. The custodial spouse can waive his or her right to the exemption, allowing the noncustodial spouse to claim it.
Tax Credits
Claiming a child as a dependent may impact other tax benefits. For example, if a child is attending college, the spouse who claims the student as a dependent is generally entitled to claim either the American Opportunity Tax Credit or the Lifetime Learning tax credit for tuition paid, assuming eligibility requirements are met. The law also allows a child tax credit of up to $1,000 annually for each qualifying dependent child under age 17.
Alimony vs. Child Support
Payments that qualify as alimony under the tax law are deductible by the paying spouse and are considered taxable income to the recipient spouse. Child support payments, on the other hand, are not deductible by the paying spouse and are not included in the recipient spouse’s income. The IRS characterizes payments that are linked to an event or date relating to a child — such as high school graduation or a 21st birthday — as child support rather than alimony. You can contact divorce attorney in Pensacola for any concerns related to the custody of your child.
These are just some of the tax planning issues that could be important in a divorce situation. Give us a call, as always, we’re available for planning assistance.
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