The Tax Consequences of Divorce

The method in which assets are divided can have tremendous tax consequences to the spouses in any divorce.

Before you decide how to distribute property or make any money agreements, you must consider the tax impact of such transfers. Although every dollar is considered by the court in dividing property or setting spousal or child support, the tax characteristics can differ widely, depending on whether the “payment” is characterized as property, spousal support, or child support. Therefore it is essential that any party to a divorce pay close attention to the relationship between divorce and how it will affect taxes. The tax consequences of equitable distribution as well as payments of spousal or child support may have many significant tax impacts such as:

• The creation of taxable income to the recipient spouse for spousal support    
• Payments and a deduction in income to paying spouse
• Potential capital gains taxes
• Basis and tax consequences of the sale of real estate or personal property
• Tax consequences of payments that result from the division of any business that is part of the marital estate

Although your divorce will become final and you will move on with the next phase of your life, the choices you make now will affect the financial climate in which you find yourself.