When agreeing on settlement terms, many divorcing couples in Tennessee often don't realize the tax implications that may result. What's more, many of these tax penalties are not a one-time deal, but will continue to penalize the divorced spouse for years to come. Divorce is complex enough, throw trying to figure out how settlement terms and division of assets impact tax obligations, and it's enough to make many couples lose their minds.
One of the major tax implications many couples fail to address centers around legal fees. Most divorcing couples are told they cannot deduct any legal fees, but some are actually deductable. While fees incurred fighting over the family dog are not deductable, those incurred while attempting to protect or settle disputes around income-producing assets are. It's crucial, therefore, that your attorney provides itemized billing statements to aid in figuring out what legal fees are and are not deductable.
How child and spousal support are characterized is another factor that can have long-standing tax implications. It's not enough to simply lump both into one category as the IRS treats payments made and received for both very differently. If there is no legal distinction made as to what monies are being paid for child vs. spousal support, tax errors and possible penalties will likely occur.
Another unpleasant, but sadly somewhat common, tax penalty can occur when one spouse decides to rack up debt using their ex-spouses name and social security number. Unfortunately if a divorce turns bitter, this type of practice can have long-standing credit and tax implications for the spouse whose identifying information was unlawfully used.
The ultimate lesson in all this tax talk is that it's wise to get the help of a professional. A skilled divorce attorney should be able to help a divorcing couple or spouse sort through all the red tape and come to a resolution that will ultimately benefit both parties.
Source: The Wall Street Journal, "Don't let a divorce cause years of tax problems," Eva Rosenberg, Mar. 5, 2012