Divorce and Finances
While divorce may end a marriage, it does not end obligations to one another. In many relationships, one spouse is more financially well-off than the other. In a divorce, this earning discrepancy means that the poorer partner is entitled to receive spousal support, or alimony, to help them establish a new, post-divorce life.
Alimony may be paid in one lump sum or on a temporary or permanent basis. The court typically will consider the circumstances of each partner when deciding how much and for how long assistance is needed.
In the past, alimony was deductible in Connecticut, while child support was not. Therefore, the deductibility of alimony payments depends on the date of your divorce. If an alimony payment is no longer deductible, it is no longer considered income to the recipient.
Taking estate planning into account may help you design a divorce agreement that minimizes the total taxes you and your soon-to-be-ex spouse will owe.
Considered separately, child support is payment to help raise young children. The custodial parent who is set to spend more time with the children generally receives child support because he or she will spend more money on childcare. These payments typically end when the children reach the age of 18 (or in some cases, 21). There is no tax deduction for child support. The person receiving child support does not need to pay income tax for receiving this money.
You can continue to claim your child as a dependent on your tax return if the divorce decree names you as the custodial parent. If the decree is silent on that point but your child lived with you during the year for a longer period of time than he or she did with your ex, you would be considered the custodial parent — and thus eligible for the exemption. It is important to specify who can take the deduction in your divorce agreement in order to prevent arguments in the future.
It is possible for the noncustodial parent to claim the exemption if the custodial parent signs a waiver pledging that he or she will not claim it. If you’re the parent who claims the dependent exemption, you are also the one who has the right to claim the child credit or an American Opportunity or Lifetime Learning college credit. So, if you cannot claim the exemption, you cannot claim those credits, even if you pay the college bills.
To recap, if you re the spouse who is paying alimony under current Connecticut law, you cannot take a tax deduction for the payments. There is no tax deduction for child support, and the person receiving child support does not need to pay income tax for receiving this money.
Divorce can affect estate planning. For example, a beneficiary overrides a will. If you are divorcing and do not wish your ex-spouse to be named as a beneficiary, you must assign a new beneficiary to any and all accounts. This includes retirement savings and 401(k) plans you participate in. Before you pursue a divorce, it is a good idea to consult with an experienced estate planning attorney to consider the impact it will have on you, your children, and your legacy.
Do you have questions?
Count on your experienced team at Ericson, Scalise & Mangan, PC to provide you with sound guidance for your Estate Planning, Elder Law, Real Estate, Probate, Trust & Estate Administration, and other legal needs. For assistance, contact us today at (860) 229-0369, or email us at info@esmlaw.com.
