Divorcing in Maryland? Three tax implications to keep in mind.

Divorce is not a simple process. There are a number of legal issues that can arise and each one can have serious long-term implications if not handled correctly during the divorce proceeding. The fact that divorce can cause social and emotional turmoil can make navigating through the legal and financial issues that arise even more difficult. A basic understanding can help. One specific area to navigate carefully involves taxes.

What do I need to know about taxes when I get divorced in Maryland?

Federal and state tax obligations may arise during the divorce. Three examples include:

• Property division. In many cases the transfer of assets triggers federal gift or income taxes. This is not the case in divorce. However, the person who receives the asset is generally responsible for any tax obligations that go with that asset. Appreciated assets, like stocks, can come with unexpectedly high tax obligations unless an exception is present. It is important to take this into consideration before finalizing a settlement agreement.
• Retirement assets. This specific asset is often an exception to the general rules. IRAs and similar retirement plans require special legal documents to avoid tax penalties when split. A Qualified Domestic Relations Order (QDRO) is required. Simply including language within the divorce settlement agreement is not enough to avoid tax penalties.
• Alimony. Those who make alimony payments can deduct the payments from their taxes. In contrast, those who receive alimony payments must pay taxes on these payments. Maryland state law also considers alimony as income. The Comptroller of Maryland defines gross income for the purposes of determining if a Maryland return is required as “wages and other compensation for services, gross income derived from business, gains (not losses) derived from dealings in property, interest, rents, royalties, dividends, alimony, annuities, pensions, income from partnerships or fiduciaries, etc.” (emphasis added for clarity)

It is important to clarify that although taxes often apply for alimony payments, they do not apply for child support payments. However, state and federal refunds may be intercepted if child support payments are required and a parent fails to make these payments.

These are only a few of the tax issues to consider during divorce. Additional issues involving health care law, filing status and which spouse can claim children as dependents should also be addressed. An experienced divorce attorney can discuss these and other legal issues that can impact your divorce.