What Are the Tax Consequences of a Divorce?

In general, the property division in a divorce is considered a nontaxable event by the IRS, because the parties are simply splitting up what they shared between them.  However, spousal support is a taxable event.  The receiving spouse pays taxes on the amount he or she receives, and the paying spouse can deduct that amount from his or her income.  Child support is neither deductible to the payer, nor taxable to the recipient.  Exemptions for the children can only be claimed by the party with primary custody, unless they agree otherwise and sign IRS form 8332.  Although the line of demarcation between "support" and "property settlement" seems clear, there are gray areas.  For example, receiving a portion of a party's stock options or the value of banked leave days might be considered part of spousal support, and therefore taxable to the receiving party, or it may be considered a lump sum award that is part of the property settlement.  The way such awards are written up in the Judgment of Divorce is critical, and can lead to unexpected tax consequences later down the road if not properly done.  That is why it is critical to retain the services of a family law attorney experienced in Michigan law, and familiar with the relevant federal tax codes.  Seeking the advice of a tax professional is also recommended.