Tax Break for Divorce Settlements
There are a number of tax breaks offered to help a divorced couple divide their assets. Alimony payments offer a tax break to the payer spouse, while child support payments offer a tax break to the payee spouse. Property transfers from a divorce settlement are exempt from the gift tax. Lastly, divorce settlements create a tax break for withdrawals from a retirement account.
Other People Are Reading
-
Alimony
-
A divorce settlement may include the requirement for one spouse to pay alimony to the other spouse. Alimony payments are required when one spouse has a significantly higher income than the other. The higher income spouse must pay alimony to support the lifestyle of the other. There is a tax break to the payer spouse for alimony. The payer spouse is allowed to fully deduct alimony payments from his income. The payee spouse must report all alimony payments as income when received.
Child Support
-
If a divorcing couple has young children, child support payments may be another part of the divorce settlement. Child support payments are made to the spouse who takes care of the children for the majority of the year. Child support payments offer a tax break to the spouse receiving payments. The payee spouse does not have pay income tax on any received child support payments. The payer spouse cannot deduct the child support payments from his taxes.
-
Property Transfers
-
The Internal Revenue Service taxes the transfer of property between Americans. This tax is called the gift tax. If you transfer more than $13,000 of property to another person in one year, you have made a taxable gift. Taxable gifts may be taxed at the current gift tax rate of 35 percent. Property transfers as part of a divorce agreement are completely tax-free. The IRS offers this tax break to help taxpayers evenly divide assets after a divorce.
QDRO
-
Early withdrawals from a work-sponsored retirement plan, like a 401k, are charged a 10 percent early withdrawal penalty. A withdrawal is considered early if the taxpayer is younger than 59 1/2. If an early withdrawal is taken to settle a divorce, it is considered a qualified domestic relations order (QDRO). QDROs are exempt from the 10 percent penalty. This tax break allows retirement assets to be used to settle a divorce.
-
References
- Photo Credit Comstock/Comstock/Getty Images
