Contested divorces are expensive, and usually even more so when the couple is arguing over significant assets. It is an unfortunate fact that people often become more aggressive when they have more to lose.
Once the process is over, many individuals find themselves looking for the taxman to offer some relief from the financial impacts of a high net-worth divorce.
Every divorce is different, so it is always best to get professional advice before tackling any new tax issues. However, there are a few basic principles that apply in nearly every case:
Legal fees: Most legal fees are not deductible, however, those that went toward protecting income-producing assets generally are. So, attorney costs for fighting for child custody are not deductible, but fees that went toward gaining control of the couple’s investment portfolio might be. If income-producing assets are going to be a big part of your divorce battle, you might want to consider asking your attorney for an itemized billing statement.
Family support: Tax treatment depends on whether the support is alimony or child support. Alimony is taxed as income to the recipient and is a deductible expense for the payer. Child support, on the other hand, cannot be deducted by the payer and is not taxable to the recipient.
Dependency exemptions: It’s best to come to an agreement on who will claim which children during the divorce process. Listing the wrong children or claiming duplicate exemptions can result in an unwanted IRS audit for both ex-spouses.
Paying off debt: It is not uncommon for one spouse to pay off the other’s credit card debt at the culmination of a divorce. In more severe cases, a soon-to-be ex-spouse might secretly take out lines of credit and list the other spouse as a responsible party. It is important to note that without a court order declaring alimony, individuals cannot claim a deduction for paying off an ex-spouse’s debt.
These are just a few of the tax issues inherent in an Arkansas high-asset divorce. If you are seeking divorce, make sure you enlist the help of an attorney who is well-qualified to handle your unique financial needs.
Source: MarketWatch, “Don’t Let a Divorce Cause Years of Tax Problems,” Eva Rosenberg, March 5, 2012.