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Consider tax issues when drafting divorce settlements

One of the least favorite times of the year for many Florida residents is tax season. It can be painful, both in terms of time and money, to go through the process of filing one's tax return. This process can become more complicated following a divorce, as the Internal Revenue Service has specific rules on how income and liabilities are to be treated for tax purposes after a divorce.

Last week, for instance, this blog discussed how the sale of the marital home can bring along tax consequences. However, the sale of property is just one of many issues that involve tax consequences after a divorce.

Another key issue with tax consequences is the payment of alimony. Under IRS rules, alimony is deductible by the payer and it must be reported as income by the recipient of the payment.

The payment has to meet certain requirements to be considered alimony by the IRS. For instance, child support is not considered alimony, along with noncash property settlements, payments to keep up the payer's property or use of the payer's property.

Payments to a third party on behalf of a spouse under the terms of a divorce agreement can be alimony, depending on the circumstances. For instance, payments for medical expenses, housing costs, taxes or tuition may qualify as alimony payments, which are treated as being received by the spouse and then paid to the third party.

Ultimately, individuals should be aware of the various tax consequences at the time of the divorce. By understanding these issues, individuals can draft their divorce settlements in a way that anticipates and incorporates any necessary issues that can later arise.

Source: Internal Revenue Service, "Publication 504 - Main Content," accessed on July 9, 2016

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