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Taxation in a Divorce Settlement Must Be Considered

If you are working through the financial issues at the end of your marriage taxation in a divorce settlement must be considered before you sign the final agreement.  Child support is neither deductible to the payor nor taxable to the recipient.  Many Californians are unaware that spousal support is taxable to the recipient and may be taken as a tax deduction by the payor, unless it is specified to be non-taxable in the final orders.  This may be a consideration if the income used to fund spousal support comes from non-taxable sources or they payor already has substantial deductions and both parties might otherwise benefit.  Another option to consider is “family support,” which basically combines child support and spousal support into a single payment.  This option may provide financial benefits to each party.

Family support is taxable to the recipient and deductible for the payor.  This may allow the payor to pay more to the recipient but actually pay less after tax deductions are accounted for.  This may be advantageous when the recipient does not have other substantial sources of income and may actually receive more net money each month after taxes (if any) than through the conventional model (child support and spousal support).  Family support must be carefully crafted to ensure proper qualification for IRS deductibility.

Decisions regarding filing jointly versus separately should also be carefully considered.  It is important to note any refund of a joint return is community property and must be treated as such.  If the family home is to be sold or if one spouse is transferring their interest in the equity to the other a taxable event can occur.  This is also true for the division of retirement accounts and other transactions where an asset is physically transferred from one to another.  It is important to understand the tax implications of your divorce settlement and seek the advice and counsel of the experienced tax and estate planning attorneys at Allen Barron.  We can also help you to update trust and estate plans or develop new ones to help move forward with your life.

Taxation in a divorce settlement must be considered before any documents are signed.  We will review the proposed divorce settlement and guide you through tax season(s) to protect your financial interests and ensure you are receiving the best settlement possible.  Best of all – our fees are tax deductible.  We invite you to contact us for a free consultation at 866-631-3470.