One of the important considerations with a divorce involves tax issues. Alimony payments are deductible to the payor, and must be reported as income by the payee. The reverse is true for child support. Assets, such as retirement interests, should be divided in way that accounts for tax consequences.

We often think about divorce in terms of dividing a couple’s assets: cars, homes, real estate, bank accounts, and investments top the list. Property division in divorce can be challenging. Sometimes, our most treasured assets don’t carry a price tag. Family keepsakes are a source of contention in divorce. They often lack monetary value, and they can be hard to divide between the parties for sentimental reasons. Learn the best course of action for dividing mementos in a divorce.

Catalogue Everything

It’s your responsibility to catalogue all of your assets in a divorce. The same responsibility applies to keepsakes. Memorabilia and gifts with special meaning should make your list. Don’t worry if the items have little monetary value. Your property will be divided in accordance with your state’s divorce laws. Minnesota is an equitable distribution state. A judge will divide assets in a way that’s fair and equitable for both parties.

For example, a couple’s dishware may be a wedding gift that passed down through generations of the wife’s family. The dishware may belong to the couple, but the wife will more likely get to keep it as part of the property division.

Who Gets the Pet?

The family pet is often a hotly contested asset. You may adoringly refer to your dog as your “baby.” The law doesn’t treat pets any differently from the family china. A poll from the American Academy of Matrimonial Lawyers found that pets are increasingly a custody issue in divorces. A judge will consider who will spend the most time caring for the pet, such as feeding, walking, and visits to the veterinarian.

Consider Your Motivations

Consider why you want a particular piece of memorabilia or family keepsake. Is it actually because it’s a memento that you can’t live without? Is it a power struggle between you and your soon-to-be ex-spouse? Does it remind you of a happier time before the divorce proceeding began? We’re all guilty of feeling spite and resentment from time to time. Ask yourself if you really want the item or if you just want more control over the situation.

Some judges will divide family keepsakes or mementos. Other judges will require that you do handle this division process through mediation. Talk to your attorney about what’s most appropriate for you.

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.

Today we wrapped up a complex case involving property division and spousal support. The litigants thought they were miles apart from each other, only to find a new best friend in Uncle Sam. With the assistance of a terrific tax accountant, we were able to craft a settlement that took full advantage of the Internal Revenue Code.

Here are eight tax tips to keep in mind as you move forward with your divorce:

  1. Child Support. Child support is not income to the recipient and is not deductible for the payer. Keep this in mind if your spouse is seeking alimony. Child support payments that they receive are not taxable and, as a result, increase their net income each month dollar for dollar. As a result, the “need” of your spouse will be diminished and you may be able to argue that their imputed gross income exceeds their gross pay coupled with untaxed child support.
  2. Alimony. Alimony is income to the recipient and is deductible for the payer. High income earners can reduce their taxable income by paying alimony. If your spouse’s tax bracket is low, the government winds up picking up the tab for a good share of the alimony obligation.
  3. Sale of Homestead. The sale of the marital homestead usually does not involve a taxable event. Capital gains (up to $500,000) from the sale of your marital homestead are not taxable if you’ve lived there for two of the last five years. Nor is a transfer of title to the residence, allowing your spouse to keep some or all of the equity. Many couples opt to forego alimony payments in, instead, pay a disproportionate property settlement to their spouse. In other words, they “buy off” alimony by giving a larger share of home sale proceeds, or equity, to their spouse. The result? No tax implications for either. Ideal for alimony recipients in a high tax bracket.
  4. Filing Status. The status of your marriage on December 31 of the relevant year determines whether you file as single or married. If you are divorced by that date, you file as single for the entire year. If your case appears to be coming to a close near the end of the year, best to speak with a tax preparer about the consequence of holding up at bit or expediting matters. We find that courts are usually willing to facilitate bringing matters to a close by the end of the year if tax implications in doing so are substantial.
  5. Dependents. While the law provides that the custodial parent is entitled to claim the relevant dependency exemptions, most couples agree to share them. Offering a non-custodial parent the right to claim the dependency exemption under the condition that their child support is current at the end of the relevant tax year provides them with incentive to keep current with payments.
  6. Child Care Credit. Custodial parents who incur work-related child care costs can deduct up to 30% of the cost. It is for that reason that the child support guidelines usually require a custodial parent to assume responsibility for a greater share of daycare expense.
  7. Liabilities and Refunds. Taxes owed, or refunds received, are usually treated as “marital” and are, therefore, split equally among the parties. In the heat of the moment, some spouses will intercept a tax refund and cash it without the other’s knowledge. All funds must be accounted for and it is likely that if they do so their share of the final property settlement will be reduced proportionately. Because income is “marital,” a tax liability is a shared responsibility.
  8. Attorney Fees. Any fees paid to a lawyer for tax advice are deductible. Ask your attorney for to break out all billable time devoted to tax issues and you can save big.

Keep in mind, the Internal Revenue Code is constantly changing and you shouldn’t rely on this post as the final word in your divorce tax planning.

If you involve a CPA in the team of professionals working on your case, they are sure to attack your situation from a unique perspective and offer creative ways to reduce your tax burden – leaving more money on the table for you and your spouse. Those extra funds may just be enough buffer to get your case settled.