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3 critical tax issues to consider when you divorce

On Behalf of | Jan 11, 2022 | Divorce |

Taxes can quickly become a problem when you don’t prepare for them during your divorce. There are many ways that you could end up owing money, so it’s a necessity to go over the tax implications of any choices you make.

You need to consider how spousal support may affect your taxes. You also have to think about how you’ll split your retirement accounts. On top of that, you’ll want to figure out who is claiming your children as tax credits, since both of you cannot. Here is more on what you need to consider as you focus on resolving your divorce issues.

  1. Spousal support could impact your taxes

To start with, spousal support rules changed because of the Tax Cuts and Jobs Act of 2017, making it so alimony payments are no longer tax deductible to the payer. This means that the person paying alimony will technically pay more, because they can’t save on their taxes. The recipient doesn’t have to claim the money for tax purposes, since the payer will cover them.

  1. Retirement accounts should be split to avoid taxation

Retirement accounts could be taxed if you cash them out. A better option is to use a qualified domestic relations order, or QDRP, because there aren’t tax consequences when you rollover the distribution into a new account appropriately. You may want to consider rolling your portion of a retirement account into an IRA to avoid taxation right now.

  1. Children can be claimed as tax credits, but only once

Finally, think about your kids. Every year, you have an opportunity to claim your children on your taxes. In a two-parent household, the parents may file their taxes jointly and claim that credit together. This is not the case once you separate and divorce. Only one of you will be able to claim your children on your taxes. You might consider alternating years when you claim your dependents, or one parent may negotiate claiming the children every year.

These are a few critical tax issues to consider when you’re divorcing. Think them through carefully to help yourself save money in the long term.