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How can decisions made during a divorce affect one's taxes?

Many people in New Hampshire do not think about taxes much until April rolls around. However, for couples contemplating divorce, decisions made during the divorce process could affect how much they pay in taxes down the road. Therefore, it is important to understand how decisions made during the divorce process could affect their taxes.

For example, it may be tempting to sell a major asset to have the finances to stay afloat during the divorce process. But, if the asset was marital property, this could negatively affect the property division process. And, even if it was separate property, there may be negative tax consequences for selling a highly-appreciated asset.

Another divorce legal issue that has tax consequences is that of alimony. For divorces finalized in 2019 and on, spouses who pay alimony are no longer permitted to deduct these payments from their income taxes. And, while the spouse receiving alimony will not have to report these payments as income, the new law could place the paying spouse in a higher tax bracket, meaning there are fewer funds available to go towards paying alimony.

Finally, spouses should be careful with the 401(k)s they retain in the property division process following a divorce. If a spouse wants to dip into their 401(k) to meet their post-divorce expenses, and they do not have taxes withheld, then they will have to pay them plus (if they are under age 59.5) a penalty from the Internal Revenue Service later on down the road. Plus, taking out a 401(k) as cash could put a person in a higher tax bracket, causing further financial strain.

So, when it comes to settling divorce legal issues such as property division and alimony, it is important to keep all legal consequences of one's choices in mind, including tax consequences. There may be ways to avoid an unwanted tax bill, though, so it is important that divorcing couples have a good picture of how tax laws will apply to them following their divorce, so they can make informed decisions.

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