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What are the Tax Implications of a Colorado Divorce?

Saturday, 05 April 2014

divorce and taxesLike any other state, getting a divorce in Colorado can be complicated, with many financial and child-related changes. The financial aspects might include the division of property, spousal maintenance and child support, and within these are many nuances, but an experienced Colorado Springs family lawyer will be well-versed on all of them. One of the most intricate details, which many couples fail to explore, is how the divorce relates to taxes.

Most Colorado Springs divorce attorneys are somewhat knowledgeable about the tax implications of divorce. However, the IRS Tax Code is voluminous and always changing. Most attorneys are not tax experts so they might hesitate to give tax advice to clients, but that doesn't mean you cannot get some general knowledge from a lawyer. One caveat is that everyone should follow-up with a tax accountant after the divorce is final. Below are some of the basic "tax topics" pertaining to a Colorado divorce case, and an explanation of each.

Maintenance: Also known in some states as alimony, maintenance is the proper term for spousal support. Colorado's statute and case law indicates that one spouse may have a duty to financially support the other, even after the marriage has ended. Maintenance laws provide that one spouse may be required to financially support the other, usually for a period of time during and after the divorce. Unlike child support, the IRS code allows the paying party to deduct the payments that he or she makes form his or her income. If you are in a situation where you are paying financial support to a former spouse, it's important to speak with a knowledgeable tax accountant to learn about your obligations and rights, which documentation you might need to provide, and how to claim the deduction. A tax accountant can also ensure you are handling your divorce-related tax affairs properly and following the IRS tax code as a maintenance-payer.

Receiving alimony or maintenance: Just as much as the payer of maintenance will be entitle to claim a deduction, a payee will recur another tax liability or obligation on the alimony. For IRS documentation, tax forms are set up to show the payer what he/she paid over the prior year. It is important to note that categorization of payments, lump sum payments and proper reporting should be set up from the beginning of the tax year.

Child Support: A common tax issue that comes up when you have children is related to the payment of child support. Another one is determining which parent has the right to claim the income tax dependency exemption for the children. One common misconception is that the custodial parent automatically has the right to claim the children on their income tax. This is not true. Colorado statutes indicate that, absent an agreement between the parents, the right to claim the income tax dependency exemption for a child shall be allocated by the court, and it is based on the income of the parents. The decision will be proportional to the parties' contributions to the cost of raising the child. This idea contradicts the advice given by many accountants, so make sure you understand the tax laws.

Unlike the dependency exemption, other aspects of tax code related to children and support do depend upon which parent has primary residential custody.
Property

Dividing property in a divorce can also bring tax ramifications. The specific tax issues which could arise relate to how the property is classified. For example, when dividing up a retirement account, the actual division isn't quite as simple as pulling out half the money and giving it to the other party. Doing that would result in a penalty and additional tax. While the transfer of property in a divorce is not considered a "taxable event," the proper procedures must still be followed. With a 401K, for example, the parties must follow through with a "Qualified Domestic Relations Order." With an IRA, no tax implications will apply as long as the accountholder rolls the spouse's portion into a qualified account.

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MPatMarrisonFor over a quarter century, we have helped people during what is often the darkest time in their lives. Divorce is not easy even under the best of circumstances. For most people, family is central. Having something go wrong in the family can have a ripple effect that extends beyond the home and into other areas.

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