Divorce and Taxes in Connecticut

February 08, 2012 (Press-News.org) Divorce and Taxes in Connecticut

Divorce is often a turbulent time for those going through it, and one of the reasons that it can be so stressful is people need to try to figure out complicated financial issues. It is difficult for many to try to plan for their financial futures while they are going through the emotional turmoil of divorce. However, those facing divorce in Connecticut need to understand the tax consequences of alimony and other payments in order to make the best decisions for themselves when negotiating property support settlements.

IRS Treatment of Alimony

The government treats alimony differently than child support payments and property settlements. Assets transferred in a property settlement and money received for child support are non-taxable. The payor cannot deduct them, either. However, the IRS considers alimony payments taxable income for recipients, and payors can deduct alimony payments on their taxes.

According to the IRS, in order for the payor spouse to claim alimony payments as a deduction, the couple must meet the following criteria:
-The parties do not file a joint return
-The parties no longer share a home
-The payor pays in cash, check or money order
-The recipient spouse receives the money
-Liability for payment ends on the death of the recipient spouse
-The parties have a divorce or separate maintenance decree
-The divorce or separate maintenance decree does not say the payments are not alimony

Payments that a payor makes before the decree of divorce or separate maintenance are not deductible. The recipient spouse must report all alimony as income. Failure to do so increases the risk of an audit.

Alternatives to Alimony

Given the tax burden accompanying alimony payments, those going through divorce may want to consider alternatives to alimony. One option is to have one spouse pay another a lump sum instead of alimony because the IRS does not treat such payments as taxable income. Such a payment is not tax-deductible for the payor, however, so the payor will likely want to offset the amount of the payment to reflect the loss of the deduction.

Divorcing couples may also consider an alimony and maintenance trust, also called a section 682 trust, in lieu of traditional alimony payments if there are not sufficient assets for a lump sum payment. One spouse transfers income-generating assets to the trust and the other spouse receives the income from those assets as alimony. These trusts are beneficial for the recipients because they ensure that payments continue in the event of financial hardship for the payors.

Consult an Attorney

Tax issues associated with divorce settlements can be complex and the guidance of professionals is often beneficial. If you are facing the end of your marriage, speak with a tax attorney about the long-term financial consequences of your divorce settlement.

Article provided by Baker Law Firm
Visit us at http://www.cttaxlawyer.com