Your marital status is an important factor in determining your income and estate tax liability. Before you change your marital status, understanding how taxes fit into this area of your life will help keep your liability low.

Alimony is deductible by the spouse paying it and taxable to the spouse receiving it. The written instrument or divorce decree cannot designate that the payments are excludable from the income of the receiving spouse or nondeductible by the paying spouse. Both spouses’ tax liabilities should be considered when determining what amounts are to be paid as alimony. Property settlements are often disguised as alimony in order to try to deduct the payments, however, regulations limit the term of the payment and the fluctuation in the amount of annual payments.

Other requirements that must be met for payments to be considered alimony are: payments must be in cash and must be received by or be directly for the benefit of the receiving spouse. Alimony liability stops upon the death of the receiving spouse.
Fees paid for obtaining alimony advice and for tax advice in connection with the divorce are deductible as miscellaneous itemized deductions. Fees paid for the divorce are not deductible.

Child support payments are not deductible by the payor spouse, nor are they income to the payee spouse. Payments must be designated as child support, if they are not, then the payments that are to be reduced when the child reaches majority, graduates from high school, leaves home, etc. will be reclassified as child support.

The custodial parent is entitled to the dependency exemption for the children unless that parent waives that right in writing. The noncustodial parent must have a written statement from the custodial parent granting the exemption. Even if the custodial parent waives the exemption, that parent may still qualify for the earned income credit, the childcare credits, and head of household rate. To do so, the parent must maintain the home for the dependent child more than half of the year.

In the settlement and negotiation process, consider giving the dependency exemption to the spouse whom will benefit most. Exemptions are phased out for higher-income taxpayers.

Regardless of which parent gets the dependency exemption, the parent who pays the child’s medical expenses may claim the related deductions along with his or her own tax return.

A transfer of property as part of a divorce settlement is not subject to income tax. However, the basis (cost for determining taxable gain) of the property transfers with the property and if the property is later sold, this may create income tax for the spouse who received the property. When dividing property at the time of the divorce, this potential tax liability should be factored into the valuation of the various assets. Keep in mind the division of properties which have no potential tax liability.

Legal fees that relate specifically to the property settlement may be added to the basis of the property.

Profits on the sale of the home of up to $500,000 for couples are now exempt from taxation. To qualify for this exemption, you must have owned the home and occupied it as your principal residence for at least two of the five years prior to the sale. It is advised that you get details on how this rule applies in a separation, divorce, or remarriage situation.

Prenuptial agreements typically involve a protection of assets and release of rights or claims against assets prior to marriage. It is often a wise choice where there are many assets, family business, and children brought into the marriage. Prenuptial agreements should be specific and both parties should consult an attorney.

A review of wills and estate plans should be done when there is any change in marriage status. Separation, divorce and remarriage have a significant impact on taxes that will be assessed upon an individual’s estate when he or she dies.