One of the most contentious periods in a divorce typically occurs during negotiations over the division of property and establishing support obligations. A shrewd divorce attorney is going to be someone who is well versed in not only the facets of family law, but who is aware of the tax implications in property settlements.
While the term “alimony” is commonly understood to be payments by one spouse to another for their support after separation, this term is very specific for purposes of income taxation. First and foremost, alimony must be in cash. While the term “cash” includes things such as checks and money orders, transfers of services or property (or use of property) are not treated as alimony. The transferor spouse receives no income tax deduction for the property transferred to their spouse and the receiving spouse does not report the property as income. Furthermore, there is no taxable gain or loss recognized on property transfers incident to a divorce.
Since the reality of life is that a divorce settlement will hardly ever result in an all-cash alimony arrangement, an evaluation by tax and legal advisors of specific assets or tax strategies is recommended before heading to the negotiating table.
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