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A few points on tax consequences in divorce


As a divorce practitioner you need to keep in mind tax consequences of divorce. Generally speaking the division of property within a divorce does not create any taxable consequences. Of course, when the recipient spouse later sells the property that he or she received in the divorce he or she may at that time incur a tax penalty upon that sale. The property ultimately disposed of will realize a taxable event. When the property passes from one spouse to the other the tax basis of that property will remain the same after it passes from the spouses jointly to the one spouse individually.

When it comes to considerations of alimony however then there will be tax considerations. Alimony is a tax deduction for the payer spouse and a taxable event for the recipient spouse. If you are counsel you should retain a tax professional and list the tax professional who will potentially testify at trial as to tax consequences at divorce. When you are dealing with a lot of money on the line you need to have a tax expert working the case with you. Get your expert on board well before the settlement conference so as to determine the taxable consequences of any potential property settlement agreement beforehand.

For purposes of child support understand that you can claim the exemption for a child within the tax code if you have the child for at least 50% of the time. Thus despite the requirement under Rivero v. Rivero that a parent only have 40% of timeshare over a calendar year to qualify for joint custody the IRS will still not allow a parent with over 40% but less than 50% to benefit from this exemption. However under the Sertic v. Sertic case the trial judge can make an order that the exemption apply even with a less than 50% custody Order.

Often times you will see family support in a Decree of support. The IRS calls this undifferentiated support. When this occurs know that the IRS will treat this "family support" as alimony and tax it in its entirety. Thus, if you are the recipient spouse be sure to separately identify the child support as being child support so as to not be hit with this penalty for the entirety of that support payment. As a practice tip if you don't want an obligation to be taxable be sure to indicate that in your divorce decree. After you do this then the recipient will not be hit with the tax penalty upon receipt and the payer spouse will not receive the deduction. Thus the parties can negotiate and stipulate as to who assumes the tax consequences of an alimony or child support payment.

With regard to lump sum alimony obligations know that the IRS is keeping an eye on these "lump sum" awards which are secretly property settlement distributions disguised as alimony so as to achieve the deduction by the payer spouse. Since lump sum alimony awards are not paid over a period of time the IRS will not see this lump sum payment as alimony. Thus there will be no deduction for the payer spouse for this lump sum payment. Also remember that if the payer spouse is going to make payments to third parties as alimony payments for the benefit of the recipient spouse that the payer spouse can receive the deduction for this payment just as he or she would for an alimony payment directly to the recipient spouse. However, an exception to this rule occurs when the payer spouse is still the owner or on title of this property. This example sometimes occurs in the case where one spouse commits to paying down the mortgage on a property that his ex-spouse will continue to reside in. Sometimes parties will agree to this circumstance as the payer spouse wants to continue to make payments on the house if or until such time as the recipient spouse can refinance the home in his or her own name.

It's important that you be able to inform your client as to the significance of signing their joint return. If both parties sign a joint return then they will each be jointly obligated for any tax burdens associated with this return. Of course there is the innocent spouse doctrine which can protect a spouse who wasn't intending on defrauding the IRS. The taxpayer must show that he or she had no knowledge of an understatement of income. He or she must demonstrate that he or she wasn't involved in any sort of fraud that may have been committed. He or she need demonstrate that he or she did not or could not have benefited from the fraud. Thus the innocent spouse has a heavy burden to prove. There are a couple other defenses which can also be asserted but these other defenses can be even more difficult to prove so beware.

Categories: Family Law