The Parties, The Lawyers, The Judge And Uncle Sam: The Key Players In Most Divorces

Many divorces involve alimony, child support and the division of assets - all of which involve taxation issues. Litigants tend to overlook the impact that these provisions will have on their taxes. As lawyers, however, we consistently take the tax consequences into account in determining what is fair and equitable under the circumstances.

Alimony payments are considered income for the person to whom the payments are made, and are deductible to the person who’s making the payments. If the parties are in different tax brackets, the government may wind up subsidizing part of the alimony payment.

In contrast to alimony, child support payments are not considered as income to the person receiving the payments, nor are payments deductible to the person making the payment. As a result, child support payments do not have any tax consequences at all. Important, however, if alimony is also an issue, to run the child support numbers and compare available cash - as opposed to gross income – in determining need versus ability to pay.

The sale of the marital homestead does not typically involve a taxable event. Capital gains up to $500,000 from the sale of the homestead will be not subject to taxation, if you have lived there for two of the last five years.

If you choose to transfer title to the residence, allowing your spouse to retain the equity, no taxable event occurs. Many clients will opt to use the home equity as an offset against alimony payments, avoiding tax issues altogether.

However, if you want to adjust the property division in a way that allows both partners to retain equal equity in assets, there may be sizable tax consequence to consider. For example, if one spouse retains the marital homestead and offers the other a retirement account in exchange for his/her share of equity in the house, the resulting settlement may not be fair to the one who takes the retirement account. That’s because if this spouse wants to access his retirement account funds, they cannot do so without incurring a tax liability. As a result, when you factor in the tax liability, the person who received the retirement account could actually end up with a lower settlement.

Simply put, a dollar of equity in a home is worth a dollar on the street. A dollar in a 401(k) plan is worth, perhaps, 70 cents on the street. For that reason, we always consider the net value of a particular asset in creating an equal property settlement.

Harrison & Hannah: Two With An Interest In Taxation

Tax season is in full swing. Thanks to Jeanne Hannah, Michigan divorce lawyer, for her summary of the IRS tax resourcesthat may be of interest to current, and former, divorce litigants.

Hannah’s recent post provides links to the IRS forms and publications that address an individual’s filing status, exemptions, tax interceptions and claims for innocent spouse relief:

Of course, our favorite tax-related link – the Beatles “Taxman,” from their 1966 Revolver album. A breakthrough songwriting effort for George Harrison, with the guitar solo, ironically, played by Paul McCartney.

Podcast: Spousal Maintenance: Factors Considered By The Court

The Family Law Show returns with an overview of spousal maintenance (alimony) awards under Minnesota law.

Alimony is an emotionally-charged issue, with significant financial implications for both parties. The spouse asked to pay rarely wants to, while the spouse asking for support usually needs it. What is the Court going to do?

Topics discussed in this podcast include the role fault plays in an alimony award, the factors the court will examine in determining how much alimony is appropriate, the factors the court will examine in determining how long alimony should be paid, and the tax implications of spousal maintenance payments.

Run Time: 13:18