Are you considering a divorce next year? Many people face irreconcilable issues in their marriage that lead them to divorce. It is important to plan for the potential long-term financial and tax consequences when planning for divorce.
If you are considering divorce next year, read more about the end of the year planning to prepare you and consult with one of our Certified Divorce Financial Analyst® professionals to discuss your specific situation.
Who Claims Any Children and Files Head of Household?
Since tax filing status is based on a couple’s marital status on December 31st of a given year, it can be confusing how to handle the final filing after a divorce. Both parties need to agree on who can claim the child or children on tax filings. A dependent or child cannot be claimed by more than one person, and the claiming party needs to meet the qualifications to claim a dependent.
Head of household status offers some tax benefits; therefore it is an important bargaining point between spouses when negotiating a settlement.
If the divorce is not finalized, the couple will need to decide whether they should continue to file a joint return, married filing separately or qualify as head of household. Consult a tax professional familiar with divorce to learn more about your options. We can recommend professionals to help you with this.
How are Alimony Payments Handled?
As of December 31, 2018, alimony payments are no longer tax deductible for the paying spouse and no longer taxable for the receiving spouse. This should be considered during the negotiation period along with the division of other assets.
Transferring Retirement Assets
There are no longer tax consequences if the transfer of retirement assets is structured as an eligible rollover distribution.
When receiving a portion of a former spouse’s qualified retirement account under a qualified domestic relations order (QDRO), the recipient needs to decide whether to keep it in the existing plan or whether to roll the funds into an IRA. If receiving a portion of an IRA, a QDRO is normally not required.
Division of Assets…and Deductions
During the division of assets and liabilities, tax carryovers like capital losses, passive activity losses, net operating losses, and charitable deductions are considered to have inherent value just like property.
You may want to include common deductions when negotiating other assets and spousal support payments.
Should You Negotiate Spousal Support?
Spousal support (alimony) is considered by the court by weighing a number of factors. However, alimony may not always be the best option to provide or receive support.
A trust with assets that make distributions can be considered as an alternative to alimony payments. The trust can also revert to the grantor (or ultimately paid to any children) at the end of the arrangement.
Contact Us for Questions on Divorce Financial Planning
We recommend speaking to a professional to go over your unique needs and decide on a plan of action for your divorce financial planning. To get started, contact Argent 2 Divorce Advisors online or call (833) 568-4900 today to meet with one of our Certified Divorce Financial Analysts®.
Jamie Blum, CPA, CDFA®
Director, Divorce Financial Planning and Litigation Support
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Argent Bridge 2 Divorce (AB2D) provides divorce financial planning services. AB2D does NOT provide legal advice. All information provided is financial in nature and should NOT be construed or relied upon as legal advice. Individuals seeking legal advice should solicit the counsel of competent legal professionals knowledgeable about the divorce laws in their own geographical areas. Divorce financial planning is a fee-only process that does not involve investment advice, securities, or insurance transactions. Argent Bridge Advisors offers investment advice, securities management, and insurance services through a separate engagement.
