As the federal tax filing deadline quickly approaches, there are several tax considerations that the newly divorced, or those contemplating divorce, should keep in mind. Divorce often brings with it child support and alimony obligations, as well as child custody determinations and property settlements. Depending on the situation, all of these factors can affect the tax filing process and its results.

When a couple is going through the divorce process, an important consideration will be the division of high-value assets. Various accounts can have completely different tax consequences. For example, if a husband takes a standard investment account and a wife takes a tax-deferred retirement account, she will wind up with a disproportionately large tax bill when she begins to receive funds from that account. But because the husband will have been making standard tax payments on the investment account for many years, there will be no such tax liability for amounts received from the account.

The most common asset owned by a married couple is the family home, and the decision over who will get the home in a divorce can have significant tax consequences. If the couple sells the home together, they will not be required to pay income taxes on any profit they glean from the sale - if that profit is less than $500,000. However, if one spouse gets the house in the divorce and later sells it, he or she will be forced to pay income tax on any profit over $250,000 as a single seller.

If the couple keeps the home under both of their names and sells it later, that may not solve the problem. To exclude the sales profits from income tax, a spouse must live in the house as his or her principal residence for at least two of the five years prior to the sale. So if a husband or wife has been living elsewhere for more than three years, income tax liability will kick in for any profit over $250,000.

We will continue our discussion of divorce and taxes later this week with a look at the potential tax liabilities and benefits of children and support payments.

Source: American Chronicle, "Divorce has obvious tax consequences, but filing issues can also crop up down the road", 10 March 2011