Tip #8: Don't Forget AboutUncle Sam -- Taxes Are Important

Don't Forget About Uncle Sam...

As you see, "DIVORCE" means much more than terminating a marriage, agreeing on the amount of child support, setting a visitation schedule, and going your own way.

Divorce means transfers and sales of property. Payments of money. Changes in economic conditions and positions. Estate and retirement planning. Wills, Gifts, and Trusts. And much more. And any time there is a transfer or a payment, either now or in the future, you must be made aware of and consider Income, Gift, and Estate tax consequences.

Sometimes, people don't know that a gift has been made and a tax is due until it's too late. People don't know that the way property is titled and who has the control over the property can make the difference between tax and no tax.

You don't need to know all of the rules that apply in each of these complex areas. But you do need make sure that before you begin paying or receiving funds, transferring or receiving property, paying debts, or signing wills and trusts, all of your taxation questions are identified and answered. We've already talked about some of the possible tax situations (sale of a home, alimony, pensions, etc.,), but there are a couple of others you should ask about.

Audits of tax returns filed during the marriage that occur after the divorce is over must be addressed in your divorce. These audits generally involve both the husband and the wife and can be expensive. Since husbands and wives are generally jointly and individually liable for the entire tax due on a joint return, regardless of who earned the income and provided the information, either can being required to pay past due taxes and penalties. If you were not the primary wage earner but signed the returns, you should try to protect yourself by including in your divorce settlement an agreement that if there is an audit, you will be indemnified from all expense and tax liability by your spouse. Although not binding on the IRS, this can give you some degree of protection on a reimbursement basis.

If you borrow substantial funds from relatives and you don't make repayment, the loan may be considered to be a gift to you and your relatives might be required to pay a gift tax. If you don't pay interest or the interest is forgiven, your relatives may be taxed as if they received from you what the interest should have been and then gave it back to you as a gift.

Legal expenses for a divorce are not deductible from income for tax purposes, but if you pay fees for tax advice, you can deduct that portion of fees. Ask your lawyer to maintain separate records concerning the tax aspects of your case. If you hire a separate tax lawyer or CPA to advise you on the tax consequences, and you pay the fees, you should be able to qualify for a deduction.