What are the Tax Ramifications of Your Divorce?
Sooner or later in your divorce, you will have to consider negotiating a divorce settlement. When you do, you might find it helpful to make your negotiations with taxes in mind. When you are in the middle of an intense negotiation session regarding your divorce settlement, you might find yourself just wanting it all to be over. This kind of thought could be dangerous, especially when it’s strong enough for you to act on it. Agreeing to just anything for your divorce settlement just because you want it over as soon as possible could be something you’d regret for the rest of your life.
Of course having such thoughts, being under such stresses is understandable. However, when it comes to your divorce settlement negotiations, you have to be as serious as possible. You also have to tread carefully in this specific aspect of your divorce. One of the most important considerations you must have during your divorce settlement negotiations is about the changes in your taxes after your divorce. If you already have tax issues that are bothering you, you definitely should bring it up to the family law attorney who is assisting you.
Relevant Tax Issues During Your Divorce
When you are trying to come up with a divorce settlement that both parties will agree on, there are relevant tax issues that you should consider. You should consider such issues prior to signing your divorce settlement. Otherwise, correcting a wrong can cost you an arm and a leg if you do it after the divorce has already been finalized. When you have a family law attorney assisting you, he or she can advise you regarding tax matters. However, unless your attorney is a licensed CPA on the side, it’s better to hire another professional to handle your tax concerns during your divorce settlement.
Dividing Retirement Accounts
It is quite common to divide retirement accounts during a divorce. Many people undergoing a divorce are encountering this issue. You might need to take some money from your retirement account to pay some of the divorce fees. In such a scenario, you would have to pay tax at the same rate as your income tax rate and you will also have to pay certain penalty fees. You have to know if your spouse is also impacted by tax in the same manner. It would really be a good idea to communicate well with your spouse during negotiation so that you can find your way around the heavy taxes. You can find a position to balance the expenses so that neither side will suffer financially. This way, you can avoid using up your community assets for your divorce fees.
You should consider well how to approach this issue during your divorce settlement negotiations. You and your spouse should decide which one of you should claim the income on your taxes. If you will be given a portion of your spouse’s retirement account, you can also liquidate that money and not be penalized for it. But if you do so, remember that you would have to pay taxes on that amount, so know beforehand how much the tax would be, if possible. You can also opt to move the portion of your spouse’s retirement account you are awarded to your own retirement account. However, you might have a need for liquid assets to pay some of your divorce fees as well as debts.
You could either be the giving or the receiving end of spousal maintenance after your divorce. You can negotiate for spousal maintenance during your divorce settlement negotiations. It is an amount of money you either give to or receive from your spouse for a specific length of time after your divorce is completed. Spousal support can be taxable depending on IRS in the state where you’re at.
There are also various financial and tax concerns regarding spousal support that you need to look into. For instance, you may be able to deduct the amount of tax from the spousal support amount in some cases, while in others, you can’t.
It would be helpful if you and your spouse can get a professional to review the language with you before you even start your divorce settlement negotiations. This will help you to be more knowledgeable and might lead you to have better arrangements for your divorce settlement.
There are also deductions that are related to your child or children. You can check the IRS laws to find out which parent can have a specific deduction for a child from his or her taxes. Knowing this would really help in your negotiations with your spouse. It can help you have a fair negotiation, or it can put you at an advantage. No matter which angle you look at it, having knowledge about tax prior to discussions related to your divorce settlement is really useful.