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Tax implications of divorce settlements in Rhode Island

On Behalf of | Jun 27, 2023 | High Asset Divorce, Property Division

Divorce in Rhode Island can have potential long-term tax consequences if improperly handled. It’s important to note, however, that every circumstance is unique, but some legal maneuvers make the process much easier for you and your soon-to-be ex.

The divorce settlement

The first step is understanding the different types of payments you may make as part of a divorce settlement. There are two common types: alimony (spousal support) and property divisions. Alimony is specifically designated funds paid from one spouse to another for living expenses or other costs associated with the divorce proceedings and is usually not taxable since 2019.

Property division involves dividing up assets acquired during the marriage, like real estate, bank accounts, retirement accounts, etc., between spouses. These payments are typically not taxable. However, there are exceptions to certain stock redemptions and trust transfers, as well as certain business interests.

Child custody and support impact on taxes

If you had children during your marriage, your custody arrangement and child support might affect your taxes moving forward. For example, if you qualify as the head of household — which requires you to pay more than half the cost of maintaining a home and have a dependent like a child living with you for over half the year — you can claim additional tax deductions.

The parent designated as paying support should also remember that court-ordered payments are not tax deductible from their income taxes. And the receiving parent does not need to report the payments as income on their taxes.

The timing

The IRS’s calendar year runs from January 1st through December 31st. It may be more advantageous to finalize your divorce after the end of the tax year (December 31st) because then you can still file your taxes as “married filing jointly” to reduce your overall tax bill. However, if you and your partner are both high earners, filing jointly could put you in a higher tax bracket than you would be in if you filed separately.

Taxes are a great consideration in a divorce, and couples should treat it as such. It helps to understand the intricate details to maximize your divorce settlement in Rhode Island. Additionally, it pays to keep good records of all documents related to the process to avoid making errors that may lead to penalties or the excruciating process of the tax audit.

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