Getting Divorced: FAQs Part 2
Make an agreement with your spouse to plan for the legal issues that will be dealt with in the future, such as division of property, alimony or support payments and child custody.
The amount of time and money that will be spent trying to reach a legal solution will be lessened dramatically if this can be done, either with the help of lawyers or court. The following are general tips to face the legal aspects of divorce:
- If there are important issues with regards to child custody, alimony or assets, find your own attorney.
- Use referrals from other professionals, trusted friends or the American Academy of Matrimonial Lawyers to find a good matrimonial lawyer.
- Verify that the agreement of divorce approaches all topics such as insurance coverage, life health and auto.
- On IRA accounts, life insurance policies, pension plans, 401(k) plans, and other retirement accounts make sure to modify the beneficiaries.
- Update your will.
Each state has their own laws regarding the division of property between ex-spouses. When it comes to applying those laws, matrimonial judges have a great amount of flexibility.
Whether or not an attorney represents you, you should make sure to have done the following:
- Learn how the laws of your state function with respect to property division.
- Make sure to have the papers to confirm that property owned separately during the marriage has been kept separate.
- Be prepared to report any non-financial contributions to the marriage that you have made – such as any non-financial contributions to his/her financial success or spousal support while he/she went to school.
- Be willing to report any need for alimony or child support.
Consider having the divorce agreement supply you with funds if you have not worked outside of the home during the marriage.
Upon completion of a divorce, individual tax returns will be filed. There are a few areas that may result in tax consequences. The following are the most common:
- Child Support
It is not taxable to the recipient and is not deductible by the payer. If it is specially designated as child support in a divorce agreement or lessened by the occurrence of a contingency relative to the child, meaning a child reaches a specified age, it is considered as a payment.
It is taxable to the recipient and deductible by the payers. It is known as a payment in accordance with a divorce agreement other than child support or when allocated in the decree as something other than alimony. In a separation agreement, similar treatment is in accordance with separate maintenance payments. Payments may not end upon death of the recipient and may not be front-loaded.
- Property Settlements
When in accordance with the divorce or separation, they are not taxable. In the event of transfers of assets amongst spouses, they do not become taxable income, gains, loses, or deductions. The recipient spouse gets the cost basis of the property. Your spouse may provide you with an equal share of the property based on a fair market value, but be careful with the lower basis. In the end, it can produce a taxable gain at the asset’s sale.
If in accordance with the qualified domestic relations order or other order of the court in the case of an IRA, these plans are separated as non-taxable. However, this is the case only if the assets stay in the retirement account or IRA. Once the funds are allocated, they will be taxed to the recipient. The payer does not get the benefit of a deduction and the recipient does not have taxable income when divided.
Typically no, although specific fees paid for income or estate tax advice due to the divorce may be deductible. The fees used to decide the alimony amount or to collect the alimony may be deducted. These would be subject to the 2% limitation under the miscellaneous item deductions.
Typically, the custodial parent has the right to the deduction. This is normally discussed in divorce agreement negotiations. If agreed to in writing, the non-custodial parent may have the deduction.
Scarsdale accountant Paul Herman is here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!
Herman and Company CPA’s proudly serves Armonk NY, Bedford Hills NY, Harrison NY, Katonah NY, Scarsdale NY, Purchase NY, Rye NY, Greenwich CT and beyond.
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