Divorce after the age of 50 is increasingly common, but it brings issues that affect older couples and women in particular.
Women should pay special attention to tax implications, such as those associated with property division, illiquid assets, and alimony.
Determining property division benefits
Women need to understand how they receive assets in the property division phase of the divorce proceeding. For example, many people want to keep the marital home. However, this is an illiquid asset that along with the need for upkeep and mortgage payments will require property tax payments. Another consideration is splitting brokerage accounts and the resulting capital gains picture. In addition, a federal gift tax applies to a life insurance policy that one party transfers to the other in the settlement agreement. Transferring the policy prior to the divorce will circumvent this kind of tax.
Comprehending the alimony tax
Under Florida law, there are several types of spousal maintenance or alimony. Examples are temporary support, permanent support or the newest type, durational support that will remain in effect for a set length of time. What those facing divorce sometimes forget is that the government sees alimony as taxable income.
Understanding the Recapture Rule
The Internal Revenue Service has instituted the Recapture Rule to apply to alimony payments made during the first three years after spouses separate or divorce. During that time, ongoing alimony payments must be substantially equal, with the goal being to prevent excessively large “front-loaded” payments. The IRS does not want divorcing couples to hide alimony payments under the guise of property settlement payments.
Anyone whose marriage is coming to an end should make it a point to understand the state of current finances thoroughly before agreeing to a divorce settlement. Tax implications abound and can result in unwelcome surprises. Understanding the effect of various taxes will help determine how much money there will be to live on in a post-divorce world.