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5 things to consider about divorce and taxes

As we've discussed in previous posts, it is important to understand financial information when entering into a divorce. At times this can be difficult, and understandably so, when you are also dealing with intense emotions. 

This is why advice and guidance from an experienced divorce attorney is vital. It is especially beneficial if your lawyer understands tax implications in a divorce, so you can avoid tax penalties and future complications.

While many tax issues can arise during a divorce, below are five that warrant particular attention:

  1. Property settlements - According to Section 1040 of the IRS tax code, there is no tax to either party on property settlements if you meet the requirements listed Section 1041 or 2516. Many divorcing couples with high value assets might not meet these requirements, and may be subject to gift or income tax. Even if your property settlement is tax free, there could be future taxes on your property to consider.
  2. Property transfers  - Section 1041 of the tax code states that property transfers that occur within one year of the marriage ending are "incident to the divorce," and therefore tax free. Transfers that occur after one year are not necessarily taxes, but may be subject to scrutiny by the IRS.
  3. Retirement accounts - IRAs and other retirement accounts may be tax-free now, but they will be taxed when they start paying out. Divorcing couples may also need a Qualified Domestic Relations Order (QDRO) to avoid immediate taxation on 401(k)s.
  4. Division of businesses - There are several ways to divide a business during a divorce. If one spouse chooses to buy out the other, this can either be considered a taxable sale or tax-free property division.
  5. Alimony - Unlike child support, alimony has an impact on taxes. Alimony payments are tax-deductible for the paying spouse and considered taxable income for the receiving spouse.

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