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Tax questions to answer before accepting a settlement

Despite what you may feel about how your divorce is going, settlements are very common. In fact, only a small percentage of contested divorces actually go to trial. However, before any settlement offer is accepted (or rejected), it is critical to understand whether such a compromise will make financial sense.

Indeed, part of compromise entails giving up something, but what may appear to be a good deal may not be acceptable after the tax implications are considered. As such, any settlement proposal should be viewed by asking the following questions.

Will you be selling any real property? – If you are selling your home or any investment properties, there may be additional income to be reported on your next tax return. This additional income may trigger capital gains taxes that you may be responsible for. Depending on the amount and when they are due (i.e. how far into the future they can be carried over), the settlement may not be worth it.

Do you know how you will allocate the child tax credit? – The specter of being subject to child support fuels many custody and parenting time battles, but the child tax credit may also be a reason why a settlement may not be so lucrative at the outset. Because of this, it is important to carefully scrutinize settlement offers in this regard.

Will spousal support be paid?  – The changes to how spousal support will be characterized under the new tax rules is also an important consideration.

Ultimately, divorcees must consider how the tax implications of their decisions will affect their post divorce lives.  


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