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.

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Photo of Cynthia Brown Cynthia Brown

Cynthia Brown is a founding partner with the Brown Law Offices, P.A. She is an honors graduate of the University of South Dakota and William Mitchell College of Law. Cynthia was admitted to practice in 1998.

After graduating from law school, Cynthia served…

Cynthia Brown is a founding partner with the Brown Law Offices, P.A. She is an honors graduate of the University of South Dakota and William Mitchell College of Law. Cynthia was admitted to practice in 1998.

After graduating from law school, Cynthia served as the law clerk to the Honorable Timothy R. Bloomquist, retired Chief Judge of Minnesota’s Tenth Judicial District. Upon completing her clerkship, Cynthia practiced with a well-known firm in Cambridge, Minnesota. She founded the Brown Law Offices, P.A. in 2003.

Cynthia has handled a wide variety of family law matters throughout the Twin Cities, and greater Minnesota, including divorce, custody, child protective services, orders for protection and harassment restraining orders. Many of her clients have also asked her to provide guidance concerning their estate planning needs.

Early in her career, Cynthia served as a prosecutor, public defender and criminal investigator. In addition to her family practice, Cynthia routinely represents clients facing criminal charges such as DWI, assault, theft and criminal sexual misconduct.

Cynthia founded the Amigos de Guatemala Foundation in 2007. She is a former Board Member and President of the Foundation, which provided educational, health and financial resources to underprivileged Guatemalan citizens. Her interest in serving the impoverished began with a medical mission trip to Honduras in 1994.

When she is not practicing law, Cynthia enjoys scrap-booking, soap-making, ATV riding and spending time with family.


Areas of Practice
  • Divorce
  • Custody
  • Child Protective Services
  • Restraining Orders
  • Criminal Defense
  • Estate Planning
Bar Admission
  • Minnesota State Bar, 1998
Education
  • William Mitchell College of Law, 1998
  • University of South Dakota, 1995
Joined Firm
  • 2003
Professional Associations & Activities
  • Minnesota State Bar Association
  • Presenter, Various CLE Courses
  • Panel Attorney, Anoka County County Family Law Clinic
  • Monthly Columnist, Minnesota Lawyer Newspaper
  • Author, Family Law Forum
  • Author, Divorce Magazine