There may not be two more feared words in the English language than “taxes” and “divorce,” but if you are considering the latter, you really have to look at the implications of the former. People considering divorce in Massachusetts have to think about how their divorce settlement or order will affect their financial health, and managing the resulting tax consequences is no small factor in one’s ability to thrive financially in the years following a divorce.
Among the primary tax considerations when filing for divorce is tax filing status. Whether one can claim the beneficial married status depends on if the divorce has become final by year’s end. But some parents who are separated yet still legally married may qualify for head of household status instead, which provides a significant deduction.
Divorcing couples with children should also be careful to distinguish between what is counted as alimony and what is counted as child support. Alimony is tax deductible for the payor whereas child support payments are not, while alimony is taxable to the recipient but child support is not. Divorced couples should be careful to note, however, that the labels they apply to a payment do not necessarily determine what it will be in the eyes of the Internal Revenue Service. Under some circumstances, the IRS may recharacterize all or some of a payment.
Another tax consideration is which parent gets the child exemption. It is usually awarded to the parent with whom the child lives for over half the year. The exemption can be worth up to $1,300 per year. Divorce can be an emotionally painful time, but it can also be a financially painful time if one fails to consider tax issues as well.
Source: Daily Finance, “Don’t Let Divorce Destroy You at Tax Time,” Dan Caplinger, July 23, 2012.
• People undergoing a divorce can better meet tax challenges with advance knowledge and preparation. If you would like more information on our firm, please visit our Massachusetts divorce page.