Will There Be Tax Implications In My Colorado Divorce?
A Colorado dissolution will change your life in a number of ways. Anything having to do with money is something to watch out for. Financial changes such as spousal maintenance, child support, and division of property are important things to remember. But taxes represent an equally important element, one that is often complicated and often overlooked. Let’s discuss how your divorce will have an effect on your taxes.
Colorado laws permit alimony. Statutes declare that one spouse may be required to monetarily provide for the other spouse, even after dissolution. Maintenance, also known as alimony or spousal support, is categorized as routine income and is consequently taxed to the payee, that is, the one getting the payments. This means the spouse receiving maintenance from a former spouse will bear another tax liability or obligation on the spousal support. Consulting with a tax accountant is probably in your best interest.
Thought of from a different perspective, maintenance payments are tax-deductible for the spouse who pays it. The spouse paying alimony to an ex should meet with a tax accountant to go over their rights and responsibilities, the paperwork required, and how to claim the deduction.
It’s wrongly assumed that the custodial parent can always claim the children on their income tax. This is not the circumstance in every case. Lacking an agreement between spouses, Colorado law suggest the court shall designate who has the right to claim income tax dependency for a child. This exception is apportioned between parents according to their contributions to the costs of raising the children. This may be a potential conflict, and should be resolved by the court or in a separation agreement. Child support is not tax-deductible, which means that payment of child support will not be accepted as an income tax deduction.
Tax consequences are also produced from dividing property in a divorce, especially in relation to how property is categorized. While transferring property in a divorce is not taxable, the right rules must be observed to prevent a taxable event.
When splitting up a 401K, for example, the actual split may not involve just giving half the account to your ex-spouse and considering it done. Withdrawing funds from a 401K or other retirement plan will usually incur a 20 to 30 percent combined penalty and tax. A “Qualified Domestic Relations Order” will be required to permit the transfer to be accomplished without the spouse who holds the plan incurring a tax liability.
With an IRA, by comparison, there are no tax penalties provided the funds get put into another IRA set up in the other spouse’s name or a comparable qualifying account. The receiving spouse will bear a tax liability only if he or she decides to cash out the funds received.
Real property is another element of property division that may impact tax concerns. Should the marital home or a second home be sold as stipulated by both spouses or as ordered by the court, then capital gains taxes may be connected with the sale. Certain tax deductions may be assigned among the parties. Unless the IRS code clearly states which party is able to claim a particular deduction, the court may assign the rights of the parties in the matter of claiming these deductions.
These are just some of the tax consequences to reflect on in a Colorado divorce. If your marital estate is complicated, it may be wise to meet with a tax professional during divorce proceedings.