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Key divorce-related tax tips to remember

No one wants to pay more in taxes than they have to. Those in Arkansas who are particularly wealthy probably have special financial advisers who help them take advantage of little-understood loopholes in the tax code. The large majority of individuals and couples, however, probably don't think much about such things.

The tax implications related to the dissolution of a marriage are something that every couple should be aware of, regardless if they or of modest means or have a complex marital estate. Following are some tips any couple going through a divorce will want to note to minimize potential disputes with the IRS.

What's taxable?

To begin with, it helps to know what aspects of a divorce are subject to tax and which are not. For example:

  • Child support is taxable if it's on a particular side of the ledger. Payments are not deductible by the parent making them. However, the receiving parent doesn't have to count it as income on his or her federal return.
  • Spousal support, commonly referred to as alimony, is handled somewhat the same way. The payer can deduct court-ordered alimony payments, even if he or she doesn't itemize on their federal return. The payer can't deduct voluntary payments, however. The receiver of alimony is required to record the money as income at tax time. To avoid a big tax hit or penalty, paying estimated taxes on that income over the course of the year is recommended.
  • Health care coverage, as required under the Affordable Care Act, is effectively a tax. If you lose coverage due to a divorce, you and any dependents for whom you are responsible still need to be registered in a plan to avoid government penalties.

Funds put into a spouse's traditional individual retirement account could be subject to tax in the year of your divorce, but payments made to your own IRA may be deductible. Any name change taken after the divorce should also trigger action to make sure that names sync up on both your returns and your Social Security Administration records.

Division of finances and property in divorce can always be tricky. It becomes more so if the estate is complex. Working with skilled legal counsel is the way to protect your rights and assets.

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