A Pennsylvania couple who is ending their marriage often goes through a long period of making arrangements to split their financial lives. Before the divorce is finalized, they should consider tax issues and document everything thoroughly. In the case of alimony, the party paying it typically may deduct it, and the recipient must declare it as taxable income. For the payer to qualify for the tax deduction, the payments must be spelled out within a divorce agreement.
Additionally, the documentation cannot label the funds as nondeductible or nontaxable. The people involved cannot be living in the same house, and no obligation to continue payments after the recipient’s death may exist.
When these requirements are not strictly adhered to, tax liabilities could result. A case decided in U.S. Tax Court illustrated this situation. A man had agreed to split the after-tax proceeds of a $250,000 bonus that he received in 2006 with his soon-to-be ex-wife. He transferred the funds to her in May 2007 but the divorce settlement was not completed until August 2007. The court order detailing other alimony terms contained no information about the split bonus. Because of this, the court ruled that the man’s tax deduction for that payment was invalid.
There are a variety of other divorce legal issues that can arise when a marriage comes to an end. The couple’s marital property will need to be divided, and if they have minor children, custody and visitation will come into play. In many cases, these matters can be handled through negotiations between the parties with the help of their respective lawyers.