Florida divorce can be a difficult and confusing process. That is why it is important to work with an experienced Florida divorce attorney that focuses his or her practice on working with clients facing similar issues. When you begin the divorce process and as you navigate through it, doing so without the help of an experienced attorney can result in you overlooking important aspects of the process. One thing many people tend to overlook in divorce is the effect it could have on your taxes. A recent article from Fox Business cites a survey in which 59% of respondents indicated that divorce served as a sort of financial “wake-up call” for them, and omitting the important role that taxes can play in your finances after divorce is one of the easiest ways to find yourself in financial difficulty after a divorce. It is important to understand the different ways divorce can affect your taxes and to work with an experienced financial planner if those things could impact you.
Child support is a unique payment arrangement that does not involve taxation. In general, the individual paying child support is not technically giving that money to another adult in the eyes of the law. Instead, they are earmarking that money to pay for things required for a child’s well-being that would have otherwise been paid for from general income. Therefore, the person ordered to pay child support cannot deduct it from their taxes. At the same time, child support is considered maintenance for providing for a shared child and is not considered income for the parent that receives it. As such, the parent receiving child support will not be required to record such support payments as income. Any modifications to child support due to changes in income or other life events are determined by the court based on what is in the best interests of the child.
Child Tax Credits
Typically, a child can only be claimed on one tax return. In a state like Florida where courts operate that the best interests of the child are served by spending as close to an equal amount of time with each parent as possible, this can sometimes pose a difficult problem. If a divorce decree names one parent as the custodial parent, then only that parent can claim the dependency tax exemption as well as the per child tax credit for each child that they are the custodial parent for, depending on their income. In cases where a custodial parent has not been named, then the individual with whom the child has spent more time during the year can claim these credits. It may even be possible for the parent eligible for such exemptions and credits to sign a waiver that allows the other parent to claim them instead. If you are responsible for medical expenses related to your child, you can typically claim those expenses on your taxes even if you are not considered the custodial parent.
Different than child support, alimony is seen as a personal financial benefit for the individual receiving it. Florida courts award alimony for a variety of reasons, including providing financial stability for a period of time until the receiving spouse can become financially independent from the marriage. Typically, the spouse being ordered to pay alimony can deduct those alimony payments from their income on their yearly taxes. In turn, that means that the spouse receiving alimony payments will need to report those payments as income on their taxes.
This approach to taxing alimony can often put spouses in different tax brackets, too. That means that the spouse paying alimony could end up paying less taxes on their income than the spouse receiving alimony depending on various other financial factors. This highlights one of the reasons that sound financial planning is an important aspect of the Florida divorce process. When you start to explore what your financial needs will be after a divorce, it is important to keep alimony payments in mind if you think that a court might approve them. One example that highlights the importance of this preparedness is that if you are budgeting based on receiving a specific amount of alimony each month, you need to be certain that you will actually receive that amount of alimony after taxes are applied or you could find yourself in financial hot water.
If you are ordered to make a lump sum alimony payment, which means you are ordered to pay alimony through one transaction, the tax consequences are relatively the same. The only difference is that such an arrangement is less likely to affect taxes in multiple successive years. However, be aware that the IRS monitors alimony payments for taxpayers to ensure that payments deducted as alimony are not actually part of a divorce settlement payout that would otherwise not be deductible. This process is known as the “recapture rule.” If the amount of alimony you pay in the third year after you start paying alimony decreases or ends during the third year, then you could be required to report some of the difference in payment amounts as income during that third year. This rule is only design to come into effect under certain circumstances which a Florida divorce attorney with alimony experience can help you understand.
Property and Related Taxes
Perhaps the most complicated area of taxes when it comes to divorce, property, and related taxes can cause a significant financial burden. For instance, if you and your former spouse decide to sell your marital home after the divorce, you could end up paying capital gains taxes if the sale price exceeds the exempted amount and other criteria related to that home have not been met.
This is a different scenario from simply having property transferred to you. If a divorce settlement assigns property to you, the transfer of that property will not be taxed. However, if you decide to sell that property at some point down the line then you could be responsible for capital gains taxes based on the increase in value of the property from the time of purchase, not the time of transfer. That is why it is important to work with an experienced financial planner on matters related to high value and other real estate transaction when it comes to divorce. Sometimes, figuring out the taxable basis of an asset is just as important as figuring out its current value because it could end up presenting you with a hefty tax bill down the line.
Legal Assistance with Florida Divorce
Divorce can be an overwhelming experience. However, working with the right attorney means you do not have to face the divorce process alone. If you have questions about how a Florida divorce could affect you or might impact your tax liability, or if you have already made the difficult decision to pursue divorce, contact Scott J. Stadler to schedule a consultation. You may be able to find out more about what concerns might apply to you throughout the Florida divorce process and some possible strategies for meeting those concerns in a productive and successful manner.