Divorce And Taxes

In divorce cases, there are simple rules applying to taxes.  Most people, however, get this wrong, even with professional help.  According to Attorney Robert Wood, one of the nation's premier experts on taxation, taxable damages, structured settlements and qualified settlement funds, the fundamental rule that causes most tax problems, is section 1041 of the internal revenue code: transfers between spouses during marriage or on cessation of marriage aren't taxed an unlimited amount of money.  There are also timing rules about how long after a marriage ends that the rules apply.

Robert Wood says, "the notion that something is a tax-free transfer doesn't mean that you don't have to plan for taxes in the future."  If a home is given to one spouse during the divorce settlement and the value of the home has increased, that spouse has to assume the tax liability of the home.

Alimony, or spousal support, is actually considered income to the spouse receiving the alimony and tax-deductible by the spouse paying the alimony.  Seems simple enough, right?  There are numerous IRS audits on both sides of a divorce finding that someone who is receiving alimony thinks it should be a property settlement and not income - and someone who is paying property settlement thinks it's like alimony and should be able to deduct it. 

Bottom line is when it comes to divorce, whether it's involving sizable amounts of money or not, the help of a professional is advised to help navigate through the tax rules.

Read Attorney Robert Wood's article on Forbes.com about this topic and for more information on Robert Wood, visit his website at www.woodporter.com.

Robert Wood is also a featured commentator on The Legal Broadcast Network and the Tax Law Channel.