Tax Considerations When Terminating a Marriage
It is again tax season. And while most of the focus is on deductions and write-offs for things such as child care to interest payments on mortgages, those in the process of obtaining a divorce or thinking about a divorce should also consider how any potential support paid to a former spouse or received from a former spouse is classified for tax purposes.
In most divorces, any tax issues that arise primarily focus on which party gets to claim a child for federal taxes and when. However, consideration must also be given to the payment of alimony and child support. Alimony is deductible to the payer and is taxable to the payee. For example, ex- husband agrees to pay the wife $5,000 in alimony and $1,000 in child support. Child support is not deductible to the payer (husband) or taxable to the payee (wife). Alimony, however, is a tax deduction for the payer (husband) and is taxable to the payee (wife) as income. Therefore, from the husband's point of view, it is better to pay more in alimony than child support. While from the wife's perspective, she would rather receive support in the form of child support rather than alimony.
Finally, in many cases debt, and who should be responsible for such debt, is an issue in dissolutions and divorces. The implications can be dramatic. For example, in a settlement the husband agrees to pay-off credit card debt in exchange for lower alimony payments. The husband then negotiates with the credit card company to settle the debt for less than half of the outstanding amount owed. In this case, the amount of debt cancelled by the credit card company is imputed income to the wife who then receives a 1099 for the forgiveness said debt and has to pay tax on the total amount of debt forgiven as income.
Sometimes, how payments and the forgiveness of debt are structured can make all the difference in finding a resolution to a serious and, perhaps, emotional situation. Painter & Westfall, has the knowledge and experience to help you consider all options in when going through a dissolution or divorce.