- Alimony payments can be tax-deductible, if they are made pursuant to a court order. (31a) Check that your order doesn’t violate the recapture rules. For more information, see IRC section 71.
- Alimony payments that are made pursuant to a court order, agreement or other legal process is taxable. You could be subject to a substantial tax bill if you fail to pay quarterly estimated payments. You can plan for next year’s taxes with estimated quarterly payments.
- If they exceed 2% of your adjusted income (think QDRO), attorney’s fees are tax-deductible. Your attorney may be able to provide tax advice. Ask your attorney for a breakdown of which portion of your bill might be tax-deductible.
- It is crucial to file status. If they have children, a divorced spouse may be eligible to file as Head Of Household. Make sure the parent who is eligible for the dependency exemptions receives them. To transfer these exemptions, use IRS Formula 8322.
- To make more income, both the spouse who is receiving alimony and the spouse who is paying it should use the tax laws to their advantage. The tax they pay on alimony can be offset if the recipient spouse pays the property and mortgage taxes.
- Many times, spouses going through divorce are cash poor and have no other source of funds than their 401K. You can include cash distribution provisions in your QDRO if you are splitting a retirement plan. Cash distributions are not subject to penalties, but they are taxable for the spouse receiving them.
- When dividing property consider the basis (cost + improvements). This will impact the taxes that you would have to pay for the sale of the property. If you own two properties that are equal in value and one of them has a lower basis than the other, the property with the lower basis is more valuable to you.
- If you withdraw funds from your IRA in substantial equal periodic payments (SEPPs), you may be able do so without penalty. This applies to all withdrawals for the next five years or until you reach 59.5 years. These rules can be complicated so get tax advice before making this decision.
- You should wait until you get married to transfer assets to your spouse. Transfers between spouses (or ex-spouses in the event of a divorce) are not recognized as gains or losses.
- While filing jointly with a spouse may result in lower taxes than filing separately for the same reason, filing jointly will leave you jointly responsible for all taxes, penalties, and interest. Innocent Spouse Relief (IRS 8857) may be available if you have already filed jointly and are being pursued by the IRS.
Summarized from an article by Walzer Melcher & Yoda LLP.
