Too frequently parties to divorce make key decisions about support and division of property without taking into consideration tax consequences that could have the practical effect of undoing what you believed to be a fair settlement.
Spousal support, what we call maintenance in Missouri, is considerable income to the party receiving it and deductible to the party paying it. Consequently, a significant amount of maintenance could be the equivalent of a very good salary and could bump the recipient into a higher than expected tax bracket. It is important for the receiving spouse to know the net effect of that tax because it might factor into a different form of support arrangement. For the party paying support, a large maintenance amount may seem cumbersome at first but when evaluated for how it lowers the tax burden may be a better than expected way to provide for a former spouse than other alternatives.
Child support is not tax-deductible and not taxable income. It is tax neutral. However, support related expenses such as health insurance, medical payments not covered by insurance, and other health-related expenses are deductible by the parent paying those expenses.
Attorney fees and other divorce-related expert fees are deductible by the party paying these fees.
Head of household versus dependency exemptions are a bit complex, but in a large family the distinction could have significant tax advantages depending on income level. So, as part of a settlement consideration, knowing the relative merits of these filing statuses would be very helpful.
Finally, please note that above certain income thresholds the net return on certain exemptions and deductions begins to recede. So, in high asset divorces, the deductions will mean much more to the lesser earning spouse, whereas the higher earning spouse might reap tax gains through property issues.
If you have additional questions about tax implications and divorce, contact us – we can help.