When most people think of the type of decisions couples face during a divorce issues such as child custody and the division of assets come to mind. However, the tax implications of some of the decisions that are made during the divorce proceedings often prove to be just as important and life altering as any other. In an article written by New York Times author
Paul Sullivan titled “4Tax Strategies That Could Make A Divorce Settlement Easier” these decisions related to the tax implications in a divorce are addressed.
One of the first strategies in this article that is addressed is moving money into a trust. In particular, it is recommended to move alimony payments to the other spouse into a trust. This is because the spouse paying alimony can no longer deduct the cost as if it were a business expense. Additionally, the spouse receiving the monies has to claim it as income. This obviously has considerable tax consequences for the spouse paying and receiving alimony. One of the ways divorce clients are being advised to handle this change is to set up a trust for the former spouse that will pay out income without the tax burden. This moves it from the category of an alimony payment to a property settlement which is tax free. Another recommendation is to sell the family home. Changes made to the amount deductible has made it significantly more difficult for many spouses who don’t have the benefit of two incomes. The deduction allowable for children has also shrunk. Many couples have started to include the deductions for children into the overall divorce negotiations. For instance, a larger financial break may be negotiated so that one parent is allowed to spend more time with the children. This is particularly beneficial when college age children have their parent’s income factored into the financial aid benefit. In this instance the spouse who makes less money a day would get the tiebreaker. Lastly, it is recommended that you practice filing separately as well as jointly in order to see what the tax implications are under both methods.