Tax planning is an important step in finalizing a divorce agreement. Here are some issues divorcing couples may want to consider.
What’s in a Name?
Alimony and child support both involve one spouse making payments to the other, but that’s where the similarity ends. Alimony payments are tax deductible to the payer and taxable to the recipient. Child support is not deductible and can be received tax free.
Dependent — or Not?
Generally, the custodial parent claims the dependency exemption, although couples can make other arrangements. Parents with more than one child may decide to split the exemptions between them. Parents might also decide to alternate claiming the exemption.
Who Gets the Credit?
The parent who claims the child as a dependent typically is entitled to claim tax credits such as the child tax credit and the credit for higher education expenses. However, a custodial parent paying work-related child care expenses can claim the child care tax credit even if the other parent claims the dependency exemption.
Assets To Transfer?
No taxes are owed on the transfer of assets between spouses. However, when dividing assets, it’s important to consider how taxes, such as capital gains, may come into play in the future.
How About Retirement Benefits?
Where retirement plan benefits have been made payable to a former spouse under a court-issued qualified domestic relations order (QDRO), subsequent distributions will be taxable to the former spouse.
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