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Tip: Review the tax consequences of your divorce settlement

Property division can be a stumbling block in divorces where one spouse took a more active role in managing the marital finances. With the help of an experienced attorney, a forensic inventory of the estate can be prepared, and the task of dividing tangible and intangible assets can begin.

Yet divorce is also about preparing for one’s financial future. In this regard, our divorce and estate-planning law firm takes a special interest in our clients. That long-term view begins with understanding the financial impact of a divorce settlement, as well as any resulting tax implications. For example, the change in tax filing status from head of household to single may result in a less favorable tax bracket. The disposition of some assets, such as a mortgage, may also have tax implications.

We encourage our clients to adopt positive post-divorce behaviors, such as updating their estate plans, and/or reviewing their retirement plans. Without economies of scale from a dual household, an individual may have to increase his or her saving allotments toward retirement. Child support payments will not qualify as a deduction to the spouse that pays it, but they must be factored into any budgeting plans.

Alimony payments generally are deductible, and must be reported as income by the individual receives it. However, if alimony payments were front-loaded in the first year, an individual should take care to avoid the IRS reclassifying the arrangement as a property settlement, which would not be eligible for a deduction.

All of this discussion underscores the importance of having an experienced attorney by your side. Simply agreeing to a property division proposal without looking deeper at the tax and financial long-term consequences may not result in a fair divorce settlement.

Source: Business Wire, “New Survey of CPA Financial Planners Explores Financial Impact of Divorce on Retirement,” Feb. 9, 2017

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