Not all divorce settlements are created equal. Two agreements that seem the same on the surface might have important tax implications that will render one a much better deal than the other. Divorce Financials family lawyer software by Easysoft Legal Software can help you craft an optimized settlement.
Alimony Vs. Child Support
This is one area where Divorce Financials really shines. Alimony is considered income by the IRS. This means the payor can deduct payments on a tax return, while the recipient has to declare it as income and pay taxes. Child support, on the other hand, is not income so is neither deductible for the payer nor taxable for the recipient.
Attorneys use Easysoft Legal Software’s Divorce Financials software to see how the tax picture changes as alimony and child support are traded off. It’s possible to have agreements that involve the same total payments each month but with very different tax responsibilities for each party.
The custodial parent gets to claim the kids on taxes…unless the parent pays AMT (Alternate Minimum Tax). In that case the dependent exemption is disallowed. In cases of substantial income disparity it might make sense for the poorer parent to be the custodial parent because of the AMT the wealthier parent will be paying.
Who Gets The House?
The house may be most fought over asset in divorce history. If there are children involved then the custodial parent usually wants the residence. If there are no children then there may be a fight to not keep the house since neither wants the financial burden. However it’s important to remember the generous tax implications of a mortgage.
The mortgage interest deduction is probably the leading reason individuals itemize on their tax returns. The tax break can amount to what is effectively an enormous discount on house payments over the course of the year. Not only does this mean the house is valuable, even in a poor real estate market, but it also means that whoever gets the house might be willing to give up support payments to make up for the tax deduction
Divorce and financial settlements are complicated even with the help of an expert. Newly divorced spouses may want to consult a tax professional the first time they file their taxes to be sure they understand how their situation has changed.
Find the best deal for your clients by using Divorce Financials to analyze the tax implications of a settlement without needing to hire an accountant.