What should a divorcing couple consider about the tax implications of a property settlement?
In negotiating a property settlement, a divorcing couple should consider the entire marital estate, including alimony, child support, the dependency exemptions, tax credits, legal fees and property distribution, so that they clearly understand the tax implications of what they have negotiated.
Then, when they have reached a dollar amount that the one pays the other (who is often the mother and the custodial parent), each must consider that the settlement accurately labels the components of the agreement, for example, what is alimony and what is child support and so forth.
As mentioned, mislabeling a property division can have profound consequences when divorcing spouses fail to consider the consequences of what are called I.R.S. recapture rules. Mislabeling alimony as child support, which may have front-end tax advantages to the payor (it’s tax deductible to him or her), can have profound taxes down the road if the recipient successfully petitions the court for an extension.